Even though you’re focused on the daily successes of your small business, take some time to execute a sound personal investment strategy. As profits roll in, it is prudent to pay yourself first before reinvesting dollars in the organization. Whether youre equipped to piece together a portfolio yourself or wish to enlist the services of an investment advisor, putting your money to work will help you reach short-, intermediate, and long-term goals. Consider the following tips when constructing an investment portfolio that is geared toward your time horizons and risk tolerance.
Build a Foundation
Before investing money in any securities, the first step in a sound investment plan is establishing an emergency fund. Most financial advisors recommend socking away three to six months’ income in highly liquid, riskless vehicles for immediate needs, such as a medical emergency or costly home repair. Ideally, savings accounts and short-term government bonds provide safety and ready access in case you have a planned or unexpected short-term financial need. Investing in liquid securities and insured deposits minimizes your risk, and the savings in your emergency fund will be intact when and if you need it.
Establish Goals and Time Frames
Once you have the foundation built, peer into the future and consider how you would like to approach it. What would you like to accomplish in one year, five years, or 10 years? Determine the optimal funding approach to reach your goals.Short-term objectives three years or less should prompt you to adopt a safe approach. Stick with those safe, liquid investments to fund near-term needs. As your horizons extend beyond five years, consider a diversified security, such as a growth mutual fund. These portfolios pool your money with other global investors. Professional money managers use those funds to purchase numerous individual stocks. Many growth mutual funds average about a 7% annual return, making them a more desirable albeit riskier investment choice.
Many Eggs in Many Baskets
One of the key tenets to smart investing and minimizing risk is diversification. Wise investment plans seek to purchase securities spread across many industries and global economies. To reduce volatility in your portfolio, opt for investments that do not move in lock-step with each other. For example, Canadian bonds have very little correlation to Chinese stocks. While Asian stocks may sound risky, realize that Chinas total output of goods and services exceeded $10 trillion in 2014. The wider your portfolio stretches, the less likely you are to suffer a loss of principal. Diversification spreads your investment accounts across a wide swath, reducing your exposure to currency risk, market risk, and credit risk.
Whether you prefer to do it yourself or trust an investment professional with your money, learn all you can about stock markets, bond markets, and foreign exchange markets. As a business owner, your time is at a premium, but you cant afford to neglect your nest egg.