By Donald Albach
You know you shouldn’t tie the revenue of your business to one product, service, or customer, but solely relying on your company for your financial future can also be risky business. Diversification beyond your business can help give you cover from a shift in the market.
You may believe your financial success requires pouring all your resources into your business. However, diversifying into income streams outside your business can help build overall financial stability and support your business.
Speaking with a financial advisor at Millstone Financial Group can help flush out key diversification strategies that can drive sustainable growth in your financial well-being as well as your business.
What Is Diversification Beyond Your Business?
Diversification is a strategy to generate income from sources other than your business. This allows you to spread your risk to reduce your vulnerability to industry shifts, market downturns, and unexpected expenses. At the same time, you can gain financial stability, which brings the ability and confidence to pursue opportunities in your business you might not have considered.
Diversification beyond your business means investing in other assets, like stocks, bonds, and real estate. Don’t worry, you still can reinvest capital in your business where it makes sense. However, you may have times when it makes more sense to invest in other opportunities or just keep your cash.
To decide when to put money into your business and when to use it somewhere else, consider these factors:
- Your risk tolerance
- Your liquidity needs
- Your opportunity costs
Reinvestments in your business won’t always lead to growth. You can expand your decision-making by recognizing that better returns may come from putting your money elsewhere.
Key Diversification Strategies to Consider
Here are six diversification strategies for you to consider:
Stock and Bond Investing
Building a diversified portfolio of stock and bond investments exposes you to other industries and markets. Investing in exchange-traded funds (ETFs) and index funds can ease the hit to your wallet and require less time to manage.
Risks to Consider:
- Stock values can be highly volatile and subject to market downturns.
- Bond prices are sensitive to interest rate changes and inflation.
- Even diversified funds can underperform or be affected by economic recessions.
Business Investing
While you want to look outside your business for investments, you still have opportunities to diversify into related industries. You can apply knowledge and skills acquired in your company to improve a business you buy or invest in.
Risks to Consider:
- Businesses can fail due to market shifts, poor management, or competition.
- Investments in private businesses are typically illiquid and can tie up capital for years.
- Legal, regulatory, and operational issues can arise unexpectedly.
Real Estate Investing
Diversification by investing in residential or commercial real estate can provide a passive rental income stream and an asset that typically appreciates. You can also consider investing in a real estate investment trust (REIT) that pays dividends and has potential appreciation without the hassle of property management.
Risks to Consider:
- Property values can decline due to economic downturns or local market issues.
- Real estate involves ongoing expenses (maintenance, taxes, insurance) and potential vacancies.
- REITs can be affected by market volatility and interest rate changes.
Investing in Alternative Assets
Alternative assets range from hedge funds and private equity to precious metals to collectibles, such as fine art. Alternative investments can provide high returns, but they also come with greater risks. Do your research and consider consulting a financial advisor.
Risks to Consider:
- Alternative assets often lack liquidity and transparency.
- Valuation can be subjective and market-dependent.
- Many carry higher fees and are sensitive to speculative market movements.
Investing in International Markets
Buying foreign mutual funds, stocks, and bonds can give you access to global markets, including emerging economies. However, consider how currency exchange rates and geopolitical events might impact your returns.
Risks to Consider:
- Currency fluctuations can erode investment returns.
- Political and economic instability in other countries can increase volatility.
- International regulations may offer less investor protection than domestic markets.
Building an Emergency Fund
An emergency fund that can cover at least six months of your expenses and is easily accessible is crucial. Your emergency fund can keep you from needing to liquidate other assets if your business runs into financial trouble.
Risks to Consider:
- Keeping large sums in low-yield savings accounts can mean missed investment opportunities.
- Inflation may reduce the purchasing power of your cash reserves over time.
- Without proper planning, an emergency fund might be insufficient in a prolonged crisis.
These types of diversification can help you mitigate risks, improve financial stability, open the door to opportunities, and build toward financial freedom.
Steps to a Diversification Strategy
To get started on a diversification strategy, take these steps:
- Establish short- and long-term financial goals.
- Draw up a diversification plan.
- Assess your level of tolerance for risks.
- Monitor your plan and adjust as needed.
Diversification does not guarantee a profit or protect against loss in a declining market. It is a strategy intended to help manage risk, but it cannot eliminate the risk of investment losses.
Consider talking with a financial advisor who can guide you through decisions about investments.
Talk to Millstone Financial Group About Diversification
Diversification can support your financial future and your business. Millstone Financial Group crafts financial plans to help you hit your financial goals, and our four-step plan keeps your goals and dreams at the center.
Schedule a complimentary consultation by calling (732) 385-8544 or emailing dalbach@millstonefinancial.net.
Advisory services are offered through Millstone Financial Group Limited Liability Company, a Registered Investment Advisor in the State of New Jersey. Insurance products and services are offered through Millstone Financial Group Limited Liability Company.
All material discussed is for informational purposes only. Opinions expressed are solely those of Millstone Financial Group Limited Liability Company and staff. All topics covered are believed to be from reliable sources; however, Millstone Financial Group Limited Liability Company makes no representations as to its accuracy or completeness. Investing involves risk including the loss of principal.
This article shall in no way be construed as a solicitation to sell securities or investment advisory services to residents of any state other than New Jersey, or where otherwise permitted. All information and ideas should be discussed in detail with your individual adviser prior to implementation.
Millstone Financial Group Limited Liability Company dba Millstone Financial Group does not offer tax planning or legal services but may provide references to tax services or legal providers. This material is intended to provide general financial education and is not written or intended as tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Millstone Financial Group may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters. You should always consult with a qualified professional before making any tax or legal decisions.
