While to some, it may seem inconsistent for small business owners to seek financial investment advice from the CEOs of larger, billion-dollar corporations. However, the case is quite the opposite.
In fact, a recent article by Inc. Magazine points to one of the biggest errors small business owners' passion and focus can result in: the overlooking of diversification, which it crowns as the “single most important” factor to lasting success and wealth.
According to the article, investing all of one’s finances into a single thing, even if it’s your business, is not sound financial sense because if times get tough, all of the individual’s money or investments could be lost.
Diversification helps to prevent such an unfortunate incident from occurring by moving some of a business’ assets away from said business. However, there are a few strategies to consider even in the diversification process, which were taken from highly successful business people.
One of the more obvious suggestions (at least to some) is to fund a dedicated retirement account both for the business owner and employees. This doesn’t mean putting away a few hundred here and there. Inc. urges business owners to put away as much as allowed.
"If that means pulling more salary from your baby, so be it,” explains the magazine. “This account is insurance against any number of possible outcomes that don't follow your script. Besides, there are some tax advantages to doing some smart retirement planning.”
It warns business owners away from an additional investment error: filing that retirement account with their own stock. Owners will want to highly consider diversifying at this point by investing outside of the company and even other industries.
Not all business owners are well versed in the investing or keeping abreast of their finances. Yet this shouldn’t stop them. Personal finance teams can help owners keep their business and personal wealth separate by creating a long-term strategy for handling options and equity while navigating tax regulations and requirements.
If business owners are still waffling about the importance of diversification, it’s not hard to find examples of when failures to do so resulted in large losses. The recent financial crisis, for example, illustrated the need for both sound business and personal investments to protect against market downturns.