You can find hundreds of books on why portfolio diversification is important, and most give sound examples of this strategy. Unfortunately, many business owners are not able to diversify their assets. Your business takes up so much capital and effort just to grow successfully, that a single minded focus on execution may seem to be the only way to prosper.
Early in the life of a business, you don’t know if you’ll survive the next payroll. You don’t know if a late receivable will force you to once again max out your credit cards to try to fight for another day. Risk concentration is very difficult to avoid, however as your company grows, you’ll hopefully discover that you’re generating profits. Now the question becomes, “What do I do with this extra cash?” This is where many entrepreneurs make decisions which may not be in their best long term interests. You may purchase a similar type of business due to familiarity, or purchase stocks because of the potential for high returns. What you may not be doing, however, is diversifying your risk.
In order to help reduce risk and preserve personal wealth, you should consider building a “total wealth portfolio.” This strategy relies on integrating your business interest with more liquid, complementary investments that seek to protect against “tail events,” or unexpected market movements.
Building this type of portfolio which can help to diversify your investments may seem counterintuitive and involve asset types which seem conservative. However, you are looking to build a portfolio which doesn’t correlate with the cycles of your business. Asking a professional who has business experience is a great way to help you achieve your financial dreams.
Any opinions are those of All Seasons Wealth and not necessarily those of RJFS or Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Diversification does not ensure a profit or guarantee against a loss.