Small business owners frequently focus all of their investment money including for their retirement, on their own business. After all, it’s the business they know best.
The problem with investing solely in your own business is one of risk, because for every immensely successful business, dozens more either fail or return only modestly. That’s why we typically counsel business owners to diversify at least some of their investment money. The following are a few suggestions:
•Start with a written investment plan that takes into account your business and will keep your finances steady through rough times.
•Build a cash cushion for your family and your business. Set aside at least three to six months of cash flow in a liquid account, such as a money market fund.
•Resist the temptation to invest only in companies in your industry, or those with whom you do business. If your industry experiences a downturn, both your business and the stocks you’ve invested in could slump at the same time. Similarly, avoid investing only in the stock of small companies or only in local real estate.
•To better diversify, we commonly recommend balancing off your business investment with large company, non regional, domestic stocks, as well as international securities and perhaps real estate investment trusts that invest in other regions and industries. Bonds are another important component of a diversified investment portfolio.
•Use your diversified portfolio as a receptacle account for harvesting cash flows from your business when they exceed your current lifestyle needs.
•The exact mix of cash, bonds and stock depends on your particular circumstances, age and tolerance for risk. The key is to remain diversified. Your business may ultimately provide all the money you need, but the other investments are there in case that doesn’t happen.
