Small business owners often spend all of their time trying to provide value to customers and overlook the importance of looking after the product of their business’s success; their personal wealth. But spending a little more time and effort managing personal investments can make a business and its owner’s personal journey far less painful in the future.
Here are some basics to assist business owners on their investment journey:
Risk and return
Similar to business, the limits governing investment decisions are risk and return. Low investment risk usually results in low investment returns. As an investment’s risk increases, a greater return is required to compensate for the additional risk.
Diversification can be summed up by the adage ‘don’t put all your eggs in one basket’. Spreading your capital over several investments lessens the possibility of losses that can arise if your investments perform poorly.
Asset classes are investment groups that behave in a similar way, display similar characteristics and are subject to the same laws and regulations. Common asset classes include cash, domestic and international equity, domestic and international fixed interest, property and infrastructure. There are two ways to invest within an asset class; passively or actively.
This investment style targets a benchmark index and is often associated with the ‘set and forget’ investment strategy, which is popular with non-active investors. Passive investing provides broad diversification at low investment management costs. However, the downside of this investment style is the inability to outperform a chosen investment benchmark.
This style of investing provides the key advantage of being able to generate additional returns above a benchmark index. Unfortunately, if engaged through an investment professional, active investing can be expensive and carries no guarantee of performance.
Investment time frame
An investment time-frame refers to the length of time intended to maintain an investment portfolio. This plays a significant role in influencing your selection of investments.
Similar to many other things in life, the hardest part of investing is getting started. Those who are starting small should consider an investment that will provide efficient diversification of investment capital, without triggering brokerage costs. As a business owner’s portfolio grows in time, they can become more targeted with their investment strategy, structure and philosophy.