When you run a small business, being able to reduce your risk of losing money can help you survive the nerve-wracking roller coaster ride. Asset allocation is the strategy of having a mix of different investments to ensure your portfolio always gains in value.
Small business owners usually think about asset allocation when they start planning for retirement, but the strategy can be used to grow your business as well. Here’s how asset allocation works in retirement planning. Say you saved up a $250,000 CAD nest egg over the past 10 years, and you’re ready to put it in a self-directed registered retirement savings plan; self-directed means that you make the investment decisions yourself. Following an asset allocation strategy, you might invest your nest egg in some stocks, bonds, mutual funds, and guaranteed investment certificates. It’s rare that all types of investments gain and lose value at the same time, so with your money spread around, if the stocks in your RRSP lose value, for example, your overall portfolio still has a good chance of growing.
You can also use asset allocation as a business development strategy to ensure that your business can survive economic downturns. With some investment capital you might, for example, buy a company that brings in new customers or add products or services that sell quickly to keep your business generating revenue in good times and bad.
When your business starts raking in the dough, and you have some money to invest, the last thing you want to do is put all your eggs in one basket. Consider asset allocation as a way to keep your bases covered, so you stay in business for the long term and retire with a nice chunk of change.