Efficiently running a business demands confidence and the ability to make accurate snap decisions, often with incomplete data. And while these skills serve well in building a business and spearheading a startup, it may not be enough when you try to enter the world of investing. As a small business owner who spends majority of his/her day minding the store, you don't have the time to read market news, real time price changes, and prospectuses that day traders and full-time investors absorb on a daily basis. But even so, this should not prevent you from finding and capitalizing on the dozens of profitable investment opportunities that present themselves on the stock and bond markets.
Countless studies and reports confirm that asset allocation is the single most crucial factor for investing success. Sadly, most small business owners or those who buy large portions of stock in a company they work for often make the mistake of putting all their eggs in a single basket. As a result, when the asset tanks, they lose most of their capital. By diversifying, you lower your portfolio's overall risk since winning positions will be able to offset losing ones. A common asset allocation strategy is a 50/50 split between stocks and bonds.
Returns on investment are relatively minuscule nowadays than they were two to three decades ago. It's nearly impossible to rely on investment returns to shoulder your retirement lifestyle. To overcome the small returns, investors must increase the amount of money they set aside each month. As a small business owner, it can be tricky to divide your cash between investing and your business operations. To simplify things, keep your bank accounts separate. Only draw money for investing from your personal accounts while leaving your business' bank account to handle business-related expenses.
Just like how you strategize in business, you should also have a systematic approach to filtering through dozens of assets to find the ones that are undervalued. Don't just blindly buy the cheapest stock you can find on a stock screener, like Finviz. There must be a predetermined criteria for judging the value of an asset before you pour any money into it. Having a strategy, such as credit spread on options or price action on stocks, eliminates the need to manually look over various assets and absorb large amounts of data about them. Small businesses should determine how much time they can spend analyzing markets and then find a strategy that best suits that time frame.
You cannot devote 100% of yourself to two things at once. That used to be true, and until this day it still holds weight. And yet modern technology has allowed humans to actually make managing multiple pursuits possible. Automating your buy and sell orders allows you to participate in the market when opportunities arise while still letting you run your business uninterrupted. With stop loss orders set on your broker account, you can also get out of losing positions before substantial losses are incurred.
Invest, Don't Speculate
As the years have gone by, the term 'investing' has also been used to mean 'speculating', which denotes a completely different process. Small businesses will do well remembering the difference between these two words. Invest in assets that you know have utility but are currently undervalued. Speculating is no different from rolling the dice or gambling in slots. Over time, the returns on investment easily surpass returns on speculation.
Small business owners should already be well familiar with risk, considering the risks they've decided to take on in building a business. Investing is very similar to entrepreneurship in many ways. But just as you shouldn't be overconfident in business, avoid being overconfident in investing. One or two wins doesn't necessarily mean you are on your way to becoming the next Warren Buffet or Paul Lynch.