Get needed financing and learn financial accounting.
Filed under Finance.
In order to reach your financial goals, you'll want to diversify your investment beyond your investment in your business. Learn how to implement a sound investment strategy that considers the amount of risk you're willing to take.
If you are like many small business owners—particularly those just starting out—a large portion of your personal assets invested in your business. This may be necessary and advisable now, but as your business develops, it is common to branch out into more general and diverse investments.
At some point, this will be true even if the additional income to be gained from continued heavy investment in your company would exceed the investment return that you could get on any "outside" investment.
Presumably, one of the main reasons why you chose business ownership was to be able enjoy a certain standard of living and personal wealth. The investment planning process that we describe here is not meant to suggest that you shouldn't take advantage of business opportunities associated with reinvesting money into your company to further its success. As a small business owner, you probably look to the continued success and growth of your company to generate a major part of your personal income. Because of this, your business certainly deserves your main attention and priority — both in time and necessary working capital.
An investment planning process such as ours will sometimes present you with the choice between investing your business profits back into your business or into a more diversified portfolio. This planning process is aimed at doing the same thing for you that your business does: increasing your personal wealth.
This process will enable you, over time, to rely less on earned income (that is, the income you derive from your efforts in your business), and more on unearned income ("outside" investments, such as stocks and bonds). The investment planning process doesn't require you to retire or pull back from your business it does build the capability to do so, if you ever so desire.
A diversified investment portfolio embodies that old saying that warns you against "putting all your eggs in one basket." By having several kinds of investments, such as stocks, bonds (government and corporate), real estate and precious metals, you greatly reduce the chance that a particular economic or legal change will devastate your investment fund.
As you read on, you may notice that in this section we'll usually address you as an "investor," rather than as a "business owner." We do this to emphasize that once you step across that threshold from investing in your business to investing in someone else's business (or land, gold, collectibles, etc.), you're pretty much in the same boat as all other potential investors.
Your experience in running your own business may help you to identify good investments, but it is just as likely that it will not be of any direct help. It's our aim to provide guidance on creating your personalized investment plan, and selecting the types of investments most consistent with such a plan.
Investment planning is a process. By following one, assume you will go through certain preliminary steps that focus on your personal situation, goals and investment preferences before you move forward to focus on selecting appropriate investments.
Many successful business owners are impatient: They want the responsibility of success in their own hands and they want to succeed now. When it comes to looking at a process for building an investment plan, they may balk, thinking: "Why the big deal? I just want to make some money in the market! I know plenty of people who do this—even Uncle George. That's it! I'll just ask Uncle George how he does it."
We have a few words of caution:
So, we recommend picking investments in a manner that is consistent with the investment planning process that we will describe. This planning process will have a dual focus: on you and on your potential investments. The act of choosing the right investment certainly is of great importance. Because of this, before you select an investment, we urge you to spend some time looking at yourself, by considering these topics:
The first step in creating an investment plan is to take stock of your current personal financial situation: your assets and your liabilities.
The list of your assets should include all your current financial assets, such as:
Because the type of investments you should make in the future is also influenced by property holdings that are outside the sphere of what are usually viewed as investments, you should also list your personal assets (such as cars and furniture).
However, your financial picture would be incomplete without a listing of your liabilities, such as mortgages, auto loans and personal charge accounts.
Make sure to account for all of your assets and liabilities before identifying your investment goals.
Whether you're a novice at investing money outside your own business or a seasoned investor, you'll do well to consider your investment goals before you plunk down any money. As is the case with most things in life, it's hard to know what to do—and to evaluate how well you're doing it—unless you have a clear idea of what you're working toward.
Some may ask: "Can't we simplify this 'identify your goals stuff ' by saying that it's the goal of all investors to maximize profit and minimize risk?" Certainly, "make money, don't lose it" is the most basic intention of all investors. The problem with using such a simplistic, all-encompassing goal is that it doesn't do much to help you identify your particular needs, and thus doesn't help you to identify the best investments.
Generally speaking, your investment goals should be closely tied to achieving your overall personal financial goals. If you do this, you'll be setting a target amount and a date to reach that target. You'll choose the type of investments, how much to invest and how often to invest based on what you'll need to reach your future goals. As time goes on, you'll check on how well your investments are doing when compared with what you need from them and make changes to your investment strategy accordingly.
Many investors set their investment goals by setting a targeted return that they want on their investments. Maybe they see this or that business commentator on TV saying that you shouldn't be content with less than X% return on your investment dollar. Or, they get advice from a knowledgeable friend or business associate. Unfortunately, this method can result in a targeted return approach that is set independently of overall financial goals. The approach usually presents a couple problems:
The most significant problem with a return-based investment goal is that even if it is successful (that is, if the return figure is achieved), it won't give you all of the needed feedback to ensure you will achieve your long-term goals.
If you want to set current targeted return goals, keep a close eye on your continued progress toward reaching your larger personal financial goals.
Generally speaking, the riskier an investment, the higher its expected return will have to be in order to entice investors. Determining how much risk to accept in your investment portfolio depends on several broad factors, including:
When you evaluate whether to incorporate a riskier investment into your investment plan, you should consider:
Family situation. A stable marriage and good health may allow you to assume a bit more risk than if you are contemplating a divorce or separation or are experiencing the physical, mental and economic effects of health problems.
Age. In general, the older you are, the less risk you may be willing to tolerate, since you are closer to the time when you may need to start living off your investment fund income (and possibly principal), and have less time to overcome the impact of investment "mistakes."
Business/employment situation. A sufficient and stable stream of personal income provided by your business, outside employment or spouse's income can go a long way toward giving you the flexibility to go for higher-return (and more risky) investments. For example, if your spouse has secure employment outside your business that provides a salary of $50,000, and employer-provided medical and retirement benefits, you might feel freer to go for more risky investments than you would if your business were the only source of your family's income.
Debt and liquidity. If you have a comfortably large fund of cash and other liquid assets to get you through a financial emergency, you probably will feel more prone to accept more investment risks than if you didn't have such a fund, or if you were burdened with a high level of debt.
Other investments. If you already have fixed income and/or other conservative investments, you may be better suited to assume more risk than if you are currently heavily invested in high risk investments.
Insurance. Investment risk is not the only risk you face; you are confronted with risk of loss because of accident, ill health, disability and premature death. If you have adequate insurance to indemnify yourself or your family on the occurrence of these risks, you have less of a need to have a large "self-insurance" fund of liquid assets. Because of this, you may feel free to move to higher return, higher risk investments.
"Just you" factors. This is last on the list, but certainly not least important. Despite what anyone tells you about the safety and return of an investment, you have every right to take a pass on any investment that unduly raises your anxiety levels. No matter how safe an investment may be from an objective viewpoint, or how much income it may generate, you probably won't find it worth it if worrying about it threatens your health.
An investment plan can be beautiful on paper, but unless you put it into effect, it won't help your financial security one bit. This brings us to a truth about investing: For every investor who fails to reach a goal because of making "bad" investments, several others fail because they didn't invest at all. They had a plan that called for making systematic investments over a period of time, but somewhere along the line the planned investments were not made.
Setting up an automatic investment plan, whereby you authorize funds to be withdrawn from a checking or savings account periodically for the purpose of making pre-determined investments, can be a good way to go. Although some investors may be wary of losing some degree of control over a portion of their income, this can be a way to make sure that you "pay yourself first."
It is particularly important to guard against any tendency to procrastinate with respect to long-term goals, such as retirement. Depending on when you start investing to fund a retirement plan and how long these funds have to accumulate and grow, a delay of one year in starting the investment fund may mean of loss of $100,000 or more.
Like any part of a complete financial plan, your investment plan and priorities can change as circumstances change, or merely with the passage of time. Because of this, an investment plan is not a "do-it-and-it's-done-with" proposition; you'll need to monitor the plan to gain maximum benefit from it.