If you’re a small business owner, many of the best practices employed by individual investors are also available to you (of course!). Still, you also have some additional options and factors to weigh while creating your investment plans. We’ve outlined five critical differences for your consideration:
1. Diversifying outside your industry
Small business owners often tend to invest within their industry, and why not? It’s one you know inside and out, where you recognize value and opportunity, and where investments can allow you to capitalize on your hard-won expertise. These are significant advantages to be weighed against the danger of placing too many of your eggs in one basket. Diversification can help reduce the risk of a downturn within your industry.
2. Regional diversification
Another temptation to keep an eye on is investing too much within one locale and potentially magnifying the effect of a localized downturn. Small business owners often stay very involved and up to date on opportunities within their region, and proximity allows for ease of investment, operation, and oversight. The risk of regional impact is similar to the risk of industry downturns described above.
3. Balancing outside investments against reinvesting in your own business
A large percentage of the net worth of many small business owners lies within a single small company – their own business. As a critical source of your present and future wealth, the temptation to funnel profits back into the business needs to be weighed against the need to diversify your holdings. A financial professional can help you place (and keep!) your business in perspective as part of your overall personal investment portfolio.
4. Greater need for liquidity and reserves
Individual investors are often encouraged to maintain an emergency fund covering three to six months of expenses. When those expenses include the capital needed to ensure the operation of a small business, this can end up being a sizable amount. Make sure that money is secure and working for you as hard as possible while remaining readily accessible. Your investment plan should factor in the disproportionate size of your liquid reserves and the need for that money to be a low risk while remaining an earning asset.
5. Investing in your retirement
Unlike those who work for an employer, you will not be automatically enrolled in a pension plan or reminded to make 401k contributions. And your retirement savings will also only be managed by a team of investment professionals if you arrange for it. To the extent that you can contribute the maximum allowable amount to your retirement each year, and enlist some retirement and tax expertise. It may well pay off in terms of realized returns and the ability to use retirement contributions to offset your yearly taxes.
Your financial professional can help you navigate the unique challenges of investing as a small business owner and can serve as an integral member of your team. Contact CF Financial if you have any questions or concerns.