If you’re a small business owner, many of the best practices employed by individual investors are also available to you (of course!), but you also have some additional options and factors to weigh while creating your investment plans. We’ve outlined five key differences for your consideration:
1. Diversifying outside your own industry
Small business owners often develop a tendency to invest within their own 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 key source of your present and future wealth, the temptation to funnel profits back into the business need 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 both secure and working for you as hard as it can 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 low risk while remaining an earning asset.
5. Investing in your own 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 not be managed by a team of investment professionals unless you arrange for it. To the extent that you’re able, 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 taxes each year.
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. Let us know if we can help!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
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