Many entrepreneurs don’t think they have time to diversify their investments as business owners. And while it is true that there are plenty of reasons to keep your money in one place, frequently, this isn’t the best idea if you want to protect your assets and ensure your financial success. Knowing what types of investments you should consider and how to diversify them will help keep you safe if something happens with one asset class or type of investment. That said, this article will cover the basics of diversifying your investments as a business owner.
1. Consider asset allocation
To diversify your investments, you must first decide how much money you want to invest. You can use a percentage of your business profits or net worth as a starting point. Suppose you have $100,000 in assets and want to grow it by 5% per year (earning enough interest to keep up with inflation), then for every dollar invested in your portfolio. In that case, about 20 cents will go into stocks, and 80 cents will go into bonds or other safe investments that pay more modest returns but won’t lose value when the market dips.
As you get closer to retirement age—or even before then—you might consider shifting more of those precious dollars from stocks into longer-term bonds, so they’ll be ready when it’s time for someone else to take over running things at your business.
2. Use different types of investments
There are various types of investments to consider when diversifying your portfolio. Some examples include stocks and bonds, real estate, gold, and other precious metals.
To diversify across different asset classes within the same type of investment (for example, investing in both domestic and foreign stocks), you may choose to invest in separate funds that track either domestic or international indexes. If you’re choosing between different types of investments altogether (for example, stocks versus bonds), try to find investments with low correlations between themselves—this means that when one goes down in value, the other tends not to follow suit.
In fact, you may even use life or health insurance to diversify your portfolio further. If you have a healthy life insurance policy, the death benefit can provide some protection against market downturns. It’s a bonus that you won’t have to worry about the cost if you need to visit a dental surgeon for dental implants or get annual physical exams for your general health.
3. Look beyond stocks and bonds
As a business owner, you can access investments that are unavailable to the public. One of the best ways to diversify your portfolio is by looking beyond stocks and bonds.
- Real estate: Commercial real estate can provide stable income and growth potential over time. If you’re looking for an investment to help pay down debt or fund future expansion needs, consider buying a property from which you can collect rent or lease space.
- Commodities: Commodity prices fluctuate based on supply, demand, and economic conditions, but commodities tend to appreciate over time due to their inherent value as raw materials for manufacturing processes. You may want to invest in individual commodities like gold bullion or grain futures (contracts about how much wheat will be delivered). Or you could invest in funds that track indexes composed of several types of commodities, such as precious metals or minerals (gold), energy (gasoline), and agricultural products (wheat).
- Equities: Equity investments include stocks and bonds representing ownership in a company or government agency. Stock prices tend to rise and fall with the overall market, but they also can increase or decrease based on the company’s performance and earnings reports. Bonds are fixed-income securities that mature at their face value (the amount you paid for them) after a specified period.
- Other assets: There are many other unique types of investments available through private equity firms specializing in this space, including private businesses and real estate investment trusts (REITs).
4. Start early to maximize returns
If you’re new to investing, it’s important to start early. Compound interest is a powerful force in the investment world, and the earlier you start saving, the more time your investments have to grow and compound dividends.
For example, you put aside $1,000 per month from age 25 until retirement at 65. That money earns an average annual return of 5%, which is reasonable for most mutual funds. At age 65, your portfolio would be worth $1 million—$500K more than if you’d waited until age 40 before starting.
5. Allow time for market performance to adjust
In addition to choosing various investments, allowing time for those investments to grow is essential. You can’t expect immediate results from your investments, so you must be patient and wait for the results.
For instance, if you invest in stocks, bonds, or mutual funds that pay dividends and interest payments over time, these will slowly add up over time until they are large enough to make a significant impact on your overall portfolio performance. And while this may take some time—years or even decades—it will eventually happen.
6. Be careful not to over-diversify
Diversifying your investments is essential, but you do want to be careful not to over-diversify.
Over-diversification can lead to underperformance because it means that too many of your assets are invested in riskier investments. This could mean your portfolio’s overall growth rate will be lowered or even negative.
This can happen when you try to be a “jack of all trades” and invest in various types of stocks, bonds, and other financial instruments without knowing what kinds of risk level suits your needs best.
By now, you should have a better understanding of how to diversify your investments as a business owner. Considering all the factors mentioned before making big decisions about your portfolio is important. While it may not be easy at first, with time and patience, you will find ways to ensure that your money is working for you instead of against it!