It is common for entrepreneurs to have most of their wealth tied up in the business. While this can generate significant returns, it does have drawbacks. Diversification can help mitigate these risks and offer alternative sources of income. Take a look at these investment strategies for small businesses in Northern Virginia.
Diversification
What is diversification? Remember that old saying “don’t put all your eggs in one basket”? Investing is the same. If you only invest in one thing, and it fails you could lose everything. But, if you have a diversified portfolio, you are less likely to be damaged by setbacks in any individual sector, security, asset class, country, or region. Furthermore, business owners can use their portfolio to counteract the potential vulnerabilities in their business. So, how do you do it?
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Diversify Your Business
As an entrepreneur, you could buy or invest in another business venture. Ideally, this would create a second income stream. While this has its appeal and can create many new opportunities, there are a few drawbacks. It does carry idiosyncratic risks. Buying another private business may not provide the liquidity you need. Furthermore, the diversification benefits are limited compared to other options.
Balancing Liquidity
Typically, small business owners need more liquidity than the average investor. However, they often hold more cash than they need. This is often due to the idea that cash is safe where stocks have market risk. However, the value of cash doesn’t rise.
Finding balance can be difficult. We typically recommend holding 3-6 months’ worth of lifestyle expenditure in liquid assets. Holding more than this amount risks achieving your financial goals through your portfolio.
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Don’t Forget Stocks
It can be difficult to shift your money from your business (which you have control over) into public stocks in businesses that you can’t control. However, this illusion of stability may be clouding your judgment. Don’t overestimate the volatility of stocks and don’t underestimate the potential returns.
Don’t avoid stocks that offer high potential returns. You will benefit from building a well-diversified portfolio, but that doesn’t happen overnight. A financial planner will help you create a portfolio that reflects your goals, as well as your risk tolerance. More mature business owners may prefer a traditional approach with bonds and global equities. On the other hand, younger entrepreneurs may look for higher-risk options.
Customize
Portfolios are not one size fits all. You can customize or tailor your portfolio to fit your needs. You may wish to reduce exposure to regions, countries, or sectors that your business is exposed to. This means you can select investments less correlated with the places your firm transacts most of its business. This may include entirely avoiding the sector your business operates in or investing more in a sector whose returns have a low correlation to the performance of your business.
If You Can’t Beat Them…
While it is admittedly a bold approach, investing in businesses with the potential to disrupt your firm is a possibility. This new development called “impact investments” focuses on companies that seek to generate interesting risk-adjusted financial returns as well as have a positive social and environmental impact.
Investment Strategies for Small Businesses in Northern Virginia
Your investment strategies will be unique to your company’s goals. While these tips will help you gain a better idea of how to diversify your portfolio, it can still be a complex process. Therefore, we recommend enlisting the services of a financial advisor. Contact Argent Bridge Advisors to learn more!
