Business

Why Entrepreneurs Need A Special Kind Of Approach To Investing

Ask most financial experts out there, and they’ll tell you about the importance of building a “well-diversified portfolio” of investments. But is that really the best approach for entrepreneurs? Entrepreneurs, especially those in high-growth businesses, often have to take a different strategy, one that’s a little more nuanced.

It’s highly likely that entrepreneurs have an investment portfolio that’s heavily skewed, compared to the average investor. Business owners often say things like “my business is my retirement strategy” meaning that they are heavily reliant on assets most closely associated with them. On the one hand, this is a good thing since they always know the state of their own investments. But on the other hand, it can be scary, especially if you don’t have a big appetite for risk.

Here are some principles for investing for entrepreneurs.

Build Yourself An Off-Limits Portfolio

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Entrepreneurs are often desperate for cash, and so having a big reserve of liquid assets in a portfolio somewhere can prove to be a significant temptation. Many entrepreneurs end up doubling down on their companies, dipping into their wealth whenever their businesses start to get into trouble and annihilating their wealth in the process.

Keep an off-limits portfolio of assets, one that you can’t get your hands on immediately. This will help you plan your business finances better in the future and incentivise you to allow your business to fail if it is clear that it isn’t making any money.

Diversify Away From Your Core Business

Diversifying for entrepreneurs is slightly different from that of the average investor. Regular investors chooses to diversify to the point where they have reduced their risk to that which is inherent in the system. But entrepreneurs often have such lopsided portfolios that doing this isn’t enough. Instead, their other investments are more like a counterbalance to their business: when their business assets start declining in value, their other investments go up.

Seeking out investments which move in the opposite direction to your company and industry is a good idea to protect your wealth. This could mean trading commodities, trading currencies, or finding an industry that moves counter-cyclically to your own. A good example might be to invest in a commodity to like gold if you are a jeweler. A hike in gold prices will harm your business overall since fewer people will be able to afford gold. But increases in the gold price will mean big business for gold stocks since mining operations will once again be profitable.

Build A Cash Cushion Immediately

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A cash cushion is a luxury that most startups can’t afford. But once your business is up and running, it’s worth holding back a bit of money. The reason for this, according to Inc magazine, is so that you have a store of wealth you can use to take advantage of new investment opportunities as they arise. This could mean investing in the early stage of a house price boom, or it could be investing in new technology to make your own business better, once that technology becomes available.

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