Why Entrepreneurs Are Turning to Diversified Investing Strategies Outside Their Business

Profits are often poured back into the firm (to hire more staff, to grow the business, invest in technology and so on), especially in the first few years. But after a while, that can leave the entrepreneur with a very large share of their personal wealth dependent on the fate of one company.

Having so much wealth bound up in a single company can complicate financial planning. Moving beyond the ‘plumber’s leaky tap’ mindset and developing a considered investment strategy to separate personal and business finances may help support longer-term financial security.

The risks of concentrating wealth in one business

Entrepreneurs may recognise the potential benefits of backing a business with their own money, although doing so can also increase concentration risk. A company can be affected by a shift in consumer demand, higher costs, new competitors, new regulations, and a lot of other things that people typically have no influence over. If your income and your personal savings are tied up in the same company, a hiccup can affect several parts of your financial life at the same time. This may be particularly relevant for founders whose net worth is largely tied to private-company shares or who regularly reinvest excess personal cash in the business. So, the goal of diversification is not to really temper the zeal of entrepreneurs, but to provide a little bit of an escape valve that entrepreneurs can pull to save part of the business, employees, and most importantly their family.

What diversification outside the business can involve

Diversification beyond your company involves investing in assets with different features rather than simply placing all your money with just one business or sector. This could involve, for example, equities, bonds, cash, property and other types of investment, depending on circumstances.

Investment funds and exchange-traded funds (ETFs) can also offer access to a basket of investments rather than just one company. Business owners who want to research further may find it useful to review how ETF providers set out their charges, investment strategies and options could form part of the consideration process.

Taking a diversified approach does not eliminate the risks associated with investing. Investment values can go down, and different assets can rise or fall at different times. Investments may benefit from being approached with a longer-term view, and investors could receive back less than they initially invest, or lose all their funds in particular circumstances.

Starting without weakening the business

Separate the two financial objectives

One possible starting point for entrepreneurial financial planning is to consider keeping business finances separate from efforts to build personal wealth. It’s still necessary to have business capital and affordable financing capital for sweeping, but personal investment is an area that can be separated.

Build gradually

In many cases, diversification doesn’t mean that a lot of money flows immediately out of the company. By investing personal excess earning to their sweep account on a regular basis, the entrepreneur can slowly build up personal, business-independent investments while still keeping capital available to invest in the company.

Balancing business reinvestment with personal wealth

The degree of reinvestment versus diversification versus your approach will depend on a lot of factors that include the stage of your business, business cash needs, personal circumstances, risk profile and long-term objectives. A relatively young, high-growth business may need significant reinvestment, whilst a more mature, cash-generating business may provide more for other investment opportunities.

At the end of the day, business owner investing should reflect the differences in purpose between the company value and personal wealth. The company can maintain focus for entrepreneurial success in its own capacity, whilst, on the side, over time, the individual can form their own diversified financial foundation.

For entrepreneurs looking beyond their next business milestone, separating personal and business wealth may help reduce reliance on a single source of financial value over the longer term. This doesn’t mean the business isn’t the core of the entrepreneur’s professional passion.

Investing involves risk and your investment may lose value. Past performance gives no indication of future results. These statements do not constitute and cannot replace investment advice.