As a business owner, you know that building a profitable enterprise comes with many challenges. That is why it is important to take care of your hard-earned money. To ensure you make the most out of your profits, diversify your investment portfolio to maximize your returns and reduce your exposure to negative economic effects.
There’s a wide range of investments you can opt for, each with varying risk profiles. Regardless of how you design your portfolio, your first strategy should be to seek the help of trusted investment advisors such as Rowland Miller + Partners to ensure that your investments are aligned with your financial goals.
Why Should Business Owners Diversify?
Business owners tend to hold much of their finances in one place – their business. However, concentrating most of your money on your business increases your exposure to a dangerous investment consequence, which is under-diversification. You need to have a more stable investment outlook through diversifying and improving your portfolio.
Diversification strategies mitigate financial risks and provide an alternative source of return during unexpected events such as financial crises. Investing in different vehicles will yield a higher return and lower risks for your business.
Four Effective Ways to Diversify Your Portfolio
Consider Index Funds
Index funds can provide steady returns that can exceed your savings account returns. Also, their diversification aspect can protect your business from buying individual bonds and stocks, which can be risky. They also have lower management fees than other funds as they are passively managed. The low transaction costs can make a huge difference in your returns, especially in the long run.
Remember that investing in index funds doesn’t ensure guaranteed success. Just like any other investment product, you need to have a strategy such as the “core and explore” approach, where index funds make up most of your portfolio (core), and selected active funds are used to enhance returns (explore).
Spread Your Wealth
Don’t put all your money in one sector. Consider investing in real estate investment trusts (REITs) or exchange-traded funds (ETFs) and don’t just stick to your home base. But always remember to maintain a manageable portfolio because it’s difficult to invest in numerous vehicles when you don’t have the resources or time to keep up. It’s recommended to limit yourself to about 20 different investments.
Consider Managed Investments
Managed investments or pooled investments are managed by a fund manager who buys and sells investments on the investor’s behalf. Some common forms of managed investments include investment funds and money market funds.
In investment funds, money from investors is placed in a diverse portfolio of bonds, stocks, and other assets. If the fund’s value rises, you can sell your share for a profit. Investment funds also have a low investment minimum, so you can invest small amounts frequently without waiting to accumulate funds to buy the entirety of some assets.
Money market funds are a popular choice for risk-averse investors because they are safer, and the funds are invested in securities that can be quickly liquidated for cash. They also have the potential for higher yields compared to conventional cash equivalents like savings from a credit union or bank.
Most money market funds require lower minimum requirements than other mutual funds. In some cases, they also have no transaction fees to buy and sell, making them a good alternative to holding cash in a brokerage account.
Know When to Change Your Investment Strategy
Keep yourself updated with any changes in the market conditions so that you will know what is happening to the companies you invest in. This way, you’ll be able to tell when to cut your losses and move on to the next investment. While changing strategies is a good idea, it’s also important to base your decisions on your long-term investment plans rather than mere instinct.
You can ask yourself important questions such as “Have my financial needs changed?” “Are my investments underperforming?” or “Has my risk tolerance changed?” You’ll be able to re-evaluate your investment portfolio if there are significant changes and ensure that your investments are not treated like impulse purchases.
Business owners are natural risk-takers – this is what makes them successful. From taking the first leap to managing numerous responsibilities, you continue to overcome every entrepreneurial challenge. But after working hard to establish your business, it’s important to preserve the financial rewards that come with your success. These portfolio diversification strategies are essential ways to ensure that your money is kept intact and help you thrive even in adverse economic conditions.
