For many small business owners, their business is their biggest asset as well as the largest producer of their family’s income. Business owners are entrepreneurs and are generally more comfortable taking on risks. For these reasons, small business owners face unique challenges when considering and selecting investments for their portfolios, and it’s important to keep in mind some basic investment principals. Not doing so can cause business owners to take on too much risk unnecessarily and can endanger their business and their income.
Here are three tips that small business owners should use to guide their investing decisions:
Establish an emergency fund
Business is cyclical for many small business owners, meaning that there will be times throughout the year when business is better than at other times, and income can vary from month to month.
That’s why it’s especially important to set up an emergency funds account containing enough cash or liquid funds to cover the months when your income does not cover your family’s living expenses. Keeping at least three to six months’ living expenses is a good rule of thumb, and more is even better. Money market accounts are good places to store these emergency funds, because they give you a better return than traditional savings accounts while remaining free of stock market volatility, which is important for a shorter-term savings vehicle.
Setting up this safety net will help to provide you some security for the times when business is down or your other investments perform poorly.
Diversify, diversify, diversify
I’m sure you have heard, probably more than once, that diversification is one of the most important concepts in investing. For small business owners this is a critical point, because many small business owners invest all of their assets back into their businesses. While investing in your business is a good idea, you should consider setting limits on the amount of money you invest back into it.
When small business owners invest all of their funds back into their companies, they are concentrating more funds into one asset. Doing this increases their level of risk. If something were to happen to their business, it could be extremely dangerous to their family’s financial security. When reviewing investment options, make sure that you are putting as much money as possible outside of your business, too. Don’t expose yourself to more risk than necessary.
While we are on the topic of diversification, small business owners should diversify outside of their industries and sectors, as well. Doing this will help to protect your portfolio if the markets change and your business’s sector goes out of favor. Not doing it means not only does your business suffer, but your other investments do as well.
Again: Diversify, diversify, diversify.
When evaluating the many different types of investment options, vehicles, risks and their impact to your portfolio, don’t overlook getting help when and where needed. There is no one-size-fits-all investment approach, and many times business owners and individuals get bogged down with research and choices. Often when considering their overall portfolio holdings, business owners forget to include some of the other investments they have like their companies or real estate investments.
Working with a professional can help you to factor in all of your investment holdings, determine your right time horizon, evaluate your risk tolerance and weigh them against your current holdings and proposed investments to help you select an investment strategy that is tailored to you.
If you are a small business owner consider these tips the next time you are evaluating or adding to your investment portfolio. They will help you avoid some common mistake others make.