Effective Investment Strategies for Small Business Owners
By Noelle Fauver
Small business owners are used to taking risks, but when it comes to investing, taking risks can put your business in a dangerous position. Your business is your biggest asset and main source of income, so you don’t want to take any unnecessary risks. Cash flow is the lifeblood of any small business, but while in early growth mode, survival is often the main goal. Investment is one of the safest ways to increase your money fast. With your business and personal financial stability at stake, you need understand how to invest your capital wisely and diversify your options for optimal results. While there are a wide array of investment strategies, here are a few specific strategies designed to help small business owners enjoy a healthy and bright financial future.
One of the most important investment strategies for small business owners is investing back into your business. However, you need to set limits since concentrating your capital in one asset can be extremely risky. If something happens to your business, your personal finances could be at risk. Find a comfortable balance between reinvesting in your own business and investing in outside opportunities.
When looking for investment opportunities outside your business, make sure not to be single-minded when it comes to where you’re investing. Often, small business owners develop a bias towards their own industry due to familiarity and comfort, and only invest in their area of expertise. While you may think your knowledge of the industry can be an advantage when evaluating different opportunities, it may not be the smartest decision to put all your eggs in one basket.
Jason Yau of Canvas People says, “diversifying your portfolio is a smart way to protect you and your business. If problems arise in your industry, your business, and the rest of your investment portfolio could be at tremendous risk, resulting in serious financial loss. How much you invest is dependent on the amount of your initial capital but, when possible, you should put your investments in a variety of industries and sectors.”
Investment diversification reduces your overall risk since some investments may be up while others are experiencing a downturn. A good strategy for diversification is to build a broad portfolio with limited investment in your own industry. Exchange Traded Funds (ETFs) and mutual funds are usually better options than individual stocks. You should also consider geographic location. Investing outside your region or country can protect your investments against economic troubles specific to one area that may be hurting your portfolio.
Investing in mutual funds containing foreign securities or commodities can protect against a national recession. Educate yourself about the financial markets and learn different asset allocation strategies. Different asset classes respond differently depending on the economic environment. By finding the right asset mix, you can maximize your return on investments. Review and rebalance your portfolio at least twice a year to ensure you’re not favoring certain asset categories over others.
In addition to diversifying your portfolio, it’s important to start investing even if you only have a small amount of capital to invest with. According to Matt Edstrom of GoodLife Home Loans, “preparing adequately for investing is important. Don’t follow the surprisingly common, albeit ill-advisable philosophy of risking a large sum of money in investing. The more practical philosophy of allocating small amounts of what you’re saving and diversifying your investments regularly provides much lower risk than risking large sums of money in one investment. The hope is that by investing small amounts on a regular basis, one’s financial portfolio can grow exponentially.”
Pin Down Investments to Serve as Steady Secondary Sources of Income
When diversifying your investments, consider investing outside the stock market. While there are several ways to do this, one of the most lucrative investment opportunities can be rental properties. It’s important to note that the current economic condition can largely influence the profitability of investing in real estate. If the property is affordable and trends indicate the property and its neighborhood are due to grow, rental properties can provide a substantial secondary income.
According to Sacha Ferrandi, Founder of Source Capital Funding, “real estate investing alone provides multiple investing options. You can purchase income producing properties, such as an apartment complex or office building. Even if you cannot purchase a larger property like an office building or apartment complex, purchasing and renting out single dwelling homes or even a condominium can still be a smart investment.
Even if you are only profiting a few hundred dollars a month after paying the mortgage, the property value will increase during the course of ownership and real returns on your investment will occur after you sell the property. Keep in mind that you’ll need to hold on to a real estate investment for at least 5-10 years to see the property appreciate and the longer you hold on to the property, the larger your earnings become.”
Don’t Neglect Retirement
With no employer provide a 401(k) and match your investment, you need to open and contribute to a retirement plan. There are different types of tax-deferred retirement account options to help you set aside money. Like any small business owner, you might be counting on selling or liquidating your business to fund your retirement. However, if you overestimate the cost you can cash out your business for, you put your future retirement in jeopardy. If you end being able to sell your business for the expected amount, you’ll end up having more money to use towards your retirement or other investments if you’ve also been saving for retirement on the side.
Start saving as soon as possible and do your best to contribute the maximum allowable amount each year. By contributing the maximum amount, you put away more money to grow your retirement fund and can also use it to offset your annual tax burden. For small business owners, a self-employed (SEP) IRA is a great, tax-free option for retirement savings. You can deposit up to $55,000 from your annual company earnings into the IRA. You can invest the money in mutual funds or ETFs. Other options include individual IRAs and annuities.
Establish an Emergency Fund
Income can vary from month-to-month when you’re a business owner. While your business insurance can protect you in the event of a catastrophe or disaster, you should set up an emergency fund with enough cash or liquid funds to cover your personal expenses when your income cannot. A good rule of thumb is to keep enough money to hold you over for at least six months.
As a small business owner, not learning to wisely invest your funds is an enormous waste of potential from a personal and professional standpoint. Learning to invest can lead to better profits and a better understanding of the importance of diversifying your investments. While there are associated risks with investing, there are plenty of safe investments (i.e. retirement) that can eliminate potential risk down the line. The risk is worth taking once you’re able to see the increase in potential for the returns on your investments. By following these investment strategies, you can make informed decisions to achieve your financial goals.
Noelle Fauver is a contributing editor for 365 Business. She has a B.A. in Communication Studies from California State University, Northridge. She has experience in marketing, finance, and small business management.