Entrepreneurs are some of the busiest people on the planet. They are always hustling and working hard to make their businesses a success. But when it comes to their finances, many entrepreneurs don’t have the time or knowledge to manage a diversified portfolio.
A diverse portfolio is important for any investor, more so for entrepreneurs. That’s because their businesses are often their most significant asset. If something happens to their business, they could lose everything they’ve worked so hard to build. Entrepreneurs can protect themselves from this type of financial devastation by having a diversified portfolio.
According to reports, the average entrepreneur works 60+ hours per week. With all the demands of running a business, it’s no wonder many entrepreneurs don’t have the time to properly manage their investments. How can busy entrepreneurs diversify their portfolios in a way that will best meet their needs?
Here are three tips:
Understand Your Risk Tolerance
Diversifying one’s financial portfolio is a critical component of sound risk management. By investing in a mix of assets, including stocks, bonds, and cash, investors can help reduce their portfolio’s overall volatility. Diversification can be an incredibly crucial tool for managing risk for busy entrepreneurs, who often have limited time to monitor their investments.
However, before diversifying their portfolio, entrepreneurs should first take the time to understand their own risk tolerance. Risk tolerance is the amount of risk an individual is willing to take in pursuit of their goals. It varies from person to person and will often change over time.
To determine your risk tolerance, you’ll need to answer some questions about your investing goals and your comfort level with risk. Some questions that may help you determine your risk tolerance include:
- What are your investment goals? Are you looking to grow your capital over time, or are you looking for a more conservative investment that will preserve your capital?
- How long do you plan to invest your money? If you’re investing for the long term, you may be able to tolerate more risk. But if you need to access your money sooner, you’ll likely want to take on less risk.
- What is your comfort level with volatility? Some investors are more comfortable with fluctuations in the markets, while others prefer a more stable investment.
By understanding their risk tolerance, entrepreneurs can ensure that their investment mix is aligned with their goals and comfort level. This will help them avoid making rash decisions that could jeopardize their financial security.
Choose the Right Mix of Asset Classes
Once you’ve determined your risk tolerance, you can start to diversify your portfolio by choosing the right mix of asset classes. Asset allocation is dividing your assets among different asset classes, such as stocks, bonds, and cash. The right asset allocation for you will depend on your investment goals and risk tolerance.
For example, if you’re looking for long-term growth, you may want to allocate a bigger portion of your assets to stocks. Stocks tend to be more volatile than other asset classes, but they also offer the potential for higher returns. Stocks are a good choice for long-term investors who can tolerate short-term market fluctuations.
On the other hand, if you’re looking for a more conservative investment, you may want to allocate a larger portion of your assets to bonds. Bonds tend to be less volatile than stocks and offer a fixed rate of return. This makes them a good choice for investors looking to preserve their capital and earn a predictable return.
Your asset allocation should also take into account your time horizon. If you’re investing for the long term, you may be able to afford to take on more risk. But if you need to access your money sooner, you’ll likely want to take on less risk.
After determining asset allocation, you can start to invest in the different asset classes that make up your portfolio. Suppose you’ve decided to allocate 50% of your assets to stocks. You can invest in a mix of different stocks, such as large-cap, small-cap, and international stocks. Similarly, if you’ve decided to allocate 30% of your assets to bonds, you can invest in a mix of different types of bonds, such as government bonds, corporate bonds, and municipal bonds.
Consider Asking For Help
Investing can be a complex process, and busy entrepreneurs may not have the time or expertise to manage their investments independently. If this is the case, consider asking for help from an individual investment advisor specializing in financial portfolio management. They can guide how to allocate your assets and make sure your portfolio is diversified.
An investment advisor can also help you stay disciplined with your investment strategy. It can be easy to make impulsive decisions when investing, but a good advisor will help you stay focused on your long-term goals. When choosing an advisor, it helps to find one with the following qualities:
- Has a screening process that determines your investment needs and goals
- Listens and understands that every investor is unique
- Thoroughly explains investment options and strategies
- Regularly reviews your portfolio and make adjustments as needed
- Is upfront about fees and commissions
The bottom line is that there’s no one-size-fits-all approach to investing. The best way to manage a diversified portfolio is to understand your risk tolerance and investment goals and choose the right asset allocation for you. And if you’re unsure where to start, don’t hesitate to ask for help from a qualified investment advisor.