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Reduce Your Personal Risk with Investment Diversification

Posted by Lance Evans on Tuesday, September 29, 2020

Discover the importance of investment diversification in order to reduce your personal risk exposure.

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Reduce Your Personal Risk with Investment Diversification

When it comes to saving for retirement, investment diversification is critical for small business owners. Many business owners tend to invest in companies within their own industry. They know the industry and they are comfortable with it. It just seems like a natural fit.

But what happens if that industry is impacted by an economic downturn? Not only will their business suffer financially, but the money they have invested in their retirement could take a hit as well. This is what happened to many people who were heavily invested in the real estate industry during the 2008 recession.

We are seeing it again with business owners invested in commercial property as some states have put rent on hold due to the coronavirus pandemic. On top of that, more businesses are working from home and are not renewing their commercial office space, causing financial strain on those businesses.

Diversifying your portfolio can help reduce your personal risk if your business is disproportionately affected by a market downturn. During such an event, you may even be able to pull from those investments to feed cashflow into your own business.

Take a Teamwork Approach to Diversifying Your Investments

There are many apps that enable small business owners and other individuals to make their own trades and investment decisions independently. However, taking a do-it-yourself approach can also increase risk, because it is impossible to separate money from emotion. Therefore, you should take a teamwork approach to investing and work closely with a fiduciary advisor that doesn’t have a conflict of interest created by product commissions.

Seek out a fiduciary advisor at a Registered Investment Advisory (RIA) firm rather than a broker. A fiduciary advisor can give you unbiased advice to help you make the best financial decisions.

You should also include your CPA and your attorney in the process. This ensures that everybody is on the same page and has all the information necessary to make the best financial and legal decisions.

Diversify with Mutual Funds and Exchange-Traded Funds

One of the easiest ways to diversify your portfolio is to invest in Exchange-Traded Funds (ETFs) or mutual funds. These offer a diverse mix of both stocks and bonds. ETFs and index mutual funds are passively managed, which means the fund’s portfolio is designed to mirror a market index and capture these returns at a low cost.  Active mutual fund managers, on the other hand, make speculative decisions as they attempt to beat the market.  These active funds are more expensive than their index counterparts and the majority of these funds fail to consistently exceed the benchmark market returns.

Stocks will typically offer higher long-term expected gains but are volatile and risk major losses during an economic downturn. On the other hand, bonds offer more modest expected returns, but are a less risky choice. Investing in an ETF or a mutual fund can give you the best of both worlds, giving you an opportunity to capture gains from stocks during a bull market, but also provide reduced volatility during a downturn.

Some other good ways to diversify may be to purchase shares in overseas companies and funds, and to invest in real estate investment trusts (REIT). These are companies that own income-generating real estate.  

Plan for Your Family’s Future

Saving for retirement is oftentimes a decades’-long process, so you should start working with a professional as early in life as possible. When it comes to choosing your investment portfolio, every business is different. At Northwest Wealth Management, we look at every piece of your business, from tax, trust and estate planning, and legacy to help you make the best financial decisions for your future.

A lot of our conversations with clients are on family dynamics and governance. Let’s say you’re a farmer and you’re planning to pass your farm on to the next generation when you’re ready to retire, but you have one child who wants to farm, and another who does not. We can help you plan your investments around that, so assets are divided fairly when the time comes. If philanthropy is important to you, we can help you set up an investment portfolio that will allow you to continue giving to charity long after you sell your business.

If you’re looking for expert advice on how to reduce your personal risk by diversifying your investment portfolio, contact one of our wealth advisors today.

Advisors represent Northwest Wealth Management, a Registered Investment Advisor and affiliate of Northwest Bank. Not FDIC Insured. Not guaranteed by bank or any government agency. May lose value. Diversification does not guarantee a profit or eliminate the risk of loss including the loss of principle. Information is intended for general education purposes and should not be considered individual investment advice.

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