You cannot invest capital without being exposed to one or more types of risk. It’s impossible to avoid risk entirely – but you can manage that risk through diversification of your assets. We’ve all heard the expression “don’t put all your eggs in one basket.” The objective is to ensure that no single event could significantly reduce the value of your assets.
Five major risks of investing are:
Let’s assume that Bill and Sarah each decided to invest $100,000. Bill decides he will invest his capital in a fixed income investment for twenty years earning an 8% interest rate. Sarah has decided to diversify by investing her capital equally in 5 different investments at $20,000 each. The table below is a conservative estimate of how their investment returns could look in 20 years’ time.
BILL | SARAH | ||
$100,000 @8% | $458,545 | $20,000 @a complete loss | $0 |
|
| $20,000 @15% | $310,428 |
|
| $20,000 @10% | $125,100 |
|
| $20,000 @5% | $47,610 |
|
| $20,000 @0% | $20,000 |
Total | $458,545 | Total | $503,138 |
As you accumulate assets for retirement, your objective is to achieve an adequate return on these assets at a risk level that is comfortable for you. Aportfolioconsistingentirelyormostlyofonetypeofasset is not going to perform as effectively or efficiently as a portfolio with a mix of assets.
You can diversify your investment capital in a number of different ways:
Your investment strategy should change over time, as you get closer to retirement. As you begin your working life, you have many years to earn an income and are therefore in a stronger position to handle the volatility of equity. As you near the end of your working life, you have fewer years of income generation and should adopt more of a capital preservation strategy. This is called the life cycle of investing.
When designing an appropriate portfolio for yourself, you needtoconsiderbothinternalandexternalfactors.Internalfactorsinclude:
External factors that you should take into consideration are:
Review your portfolio each time any of these factors, both internal and external, change significantly.
Don’t fall into the pitfall of making decisions based solely on the risk and potential rate of return, but instead consider them in the overall context of your portfolio. You will want to have some low risk investments in your portfolio for cash emergency purposes. But for higher rates of return, keep some high risk investments as well, so long as these high risk investments are kept to an appropriate percentage of your overall investment strategy.
INVESTMENT OBJECTIVE | IMPORTANCE OF OBJECTIVE | ||||
A Must | High | Neutral | Small | None | |
Current Income | 2 | 4 | 6 | 8 | 10 |
Liquidity | 2 | 4 | 6 | 8 | 10 |
Capital Preservation | 2 | 4 | 6 | 8 | 10 |
Short Term Volatility | 2 | 4 | 6 | 8 | 10 |
Growth Of Capital | 10 | 8 | 6 | 4 | 2 |
Tax Advantages On Income | 10 | 8 | 6 | 4 | 2 |
Deferred Tax Growth | 10 | 8 | 6 | 4 | 2 |
TOTAL SCORE _______________ | |||||
TOTAL SCORE | BALLPARK ESTIMATE - ASSET ALLOCATION | ||
Cash & Illiquid Fixed Income (Savings Account, Money Markets, Treasury Bills, Term Deposits, GIC’s, Annuities) | Liquid Fixed Income | Equity | |
Bonds, Mortgages, Bond Mutual, Mortgage Mutual | Common & Preferred Stock, Real Estate, Growth Mutual | ||
14 - 20 | 60% | 30% | 10% |
22 - 30 | 40% | 40% | 20% |
32 - 40 | 30% | 30% | 40% |
42 - 50 | 10% | 30% | 60% |
52 - 60 | 10% | 20% | 70% |
62 - 70 | 5% | 5% | 90% |
Image by Gerd Altmann from Pixabay
However, it’s essential – especially for rookie investors – to set clear investment goals and develop a well-thought-out strategy to reduce risk and sidestep the common pitfalls.
The first step in any investment journey is to define your goals. What is the principal purpose of the investment? Is it to accumulate a nest egg for retirement, a down payment on a house, or your child’s education? Your goals will dictate your investment strategy, including the types of assets you invest in, the length of the investment, and your level of risk tolerance.
Risk tolerance refers to the degree of uncertainty an investor is willing to accept in connection with the return on their investments. It’s vital that you assess your risk tolerance prior to investing in order to ensure your investment strategy aligns with your comfort level regarding any potential losses. Remember: Never invest any more than you can afford to lose.
The team “diversification” means spreading your investment dollars across various types of asset classes to reduce your risk and exposure. This strategy can help protect your portfolio from significant losses, since poor performance in one asset class can potentially be offset by strong performance in another.
Your investment needs and goals will most likely change over time, and you should adjust your investment strategy to accommodate those changes. A regular review of your portfolio can help to ensure that it remains aligned with your current financial situation and long-term goals.
Investing can be complex, and if you’re not an expert you should seek expert advice. A financial advisor can provide valuable guidance and help you develop a personalized investment strategy. They can also introduce you to investment opportunities you may not have been aware of and advise you of potential tax liabilities.
There are several reasons that investors fail to achieve success with their investment strategy:
Lack of knowledge. Not understanding the investment landscape or the appropriate strategies and tactics that should be used to navigate it.
Lack of guidance.Not seeking financial guidance if one has a lack of knowledge, time or suitable investment temperament.
Investor Behavior.
Trying to time the market.
Trying to switch to “hot” performing investments with the best rates of returns over the past 6-12 months.
Insufficient monitoring of investment performance over time.
Achieving your investment goals requires careful planning, regular review, and a willingness to adapt your strategy as needed. By following these steps, you can navigate the investment landscape with confidence and move closer to your financial goals.
Created and developed partially with AI.
Image by Mohamed Hassan from Pixabay
As a small business owner, you know how important it is to have enough funds on hand to keep your business running. These available funds are known as working capital, and they are needed to run a healthy business.
Inadequate working capital levels are cited by the SBA Small Business Administration as one of the top reasons for small business failure. As such, learning about and securing proper levels for your company is crucial.
Simply put, working capital is the difference between your current assets and current liabilities. Current assets are those that can be converted to cash within a year, while current liabilities are debts and obligations due within a year. Without enough working capital, you may not be able to pay creditors or meet your operating needs. But how do you know how much you have, and how much you need?
To determine how much working capital your business has, you can use this calculator. It calculates working capital by using four inputs – annual growth, current target ratio, total assets, and total liabilities. Annual growth refers to your expected annual growth for the next year, while the current target ratio is current assets divided by current liabilities. For most businesses, a ratio of around 2.0 is optimal.
There are a number of factors that influence how much working capital a business needs. For instance, seasonal businesses need more working capital to keep them afloat in the off-season and to meet the higher expenses that often occur during preparation for the peak season. When deciding how much working capital your business needs, consider your industry, growth rate, and fixed costs.
So, now you know how much working capital you have, and how much you need. But where do you get it? Small businesses often need additional working capital to get through difficult periods. A working capital loan can help fill temporary funding holes and keep your business up and running. Working capital loans are designed specifically for small business owners who need short-term capital. These loans are often available through online lenders, and offer real advantages over traditional bank loans.
Working capital loans are generally easier to get approved, faster to get funded and more convenient to use, providing fast capital when you need it. Repayment periods tend to be shorter, months rather than years, as the loan is intended to get the business through a short-term cash flow problem.
When you apply for a working capital loan, lenders will consider several factors to determine if you qualify. Some banks will ask for your financial statements and a balance sheet, then they will check your business and personal credit scores, the length of time your company has been in business, and annual revenue.
Alternative lenders will not wholly rely on your credit reports instead they will review your actual business metrics and transactions in your accounts such as; bank, accounting software and credit card payment processors. You'll need to provide financial statements and a balance sheet.
Lenders vary in what businesses they prefer to lend to. Some will provide loans to businesses with credit scores below 500, as long as they are generating sufficient revenue or have been in business at least a year, while others require higher credit scores, greater revenue, and more years in operation.
Now that you know how much working capital you have, you can think about the best way to use it to benefit your business. In addition to fixed costs, you can use working capital to build and improve your business. These monies can be used to pay for expensive equipment that often requires large upfront payments.
You can also fund your businesses expansion with new or remodeled office space, a second location, and other improvements are common. Also, you can expand your staff, hiring new staff and paying for their training. Every industry has its own best uses of working capital. Hair salons often invest in advertising campaigns while auto repair shops buy car accessories to sell and install in customer's vehicles.
Finally, working capital can provide a sense of security. With a generous cushion, you are prepared for any setback or unforeseen circumstance that may arise – which affect all small businesses. With sufficient capital on hand, you can rest easy, knowing that your business expenses can be met.
Image by jacqueline macou from Pixabay
Marsha Kelly sold her first business for more than a million dollars. She has shared hard-won experiences as a successful serial entrepreneur on her Best4Businesses blog, where she also regularly posts business tips, ideas, and suggestions as well as product reviews for business readers. As a serial entrepreneur who has done “time” in corporate America, Marsha has learned what products and services work well in business today. You can learn from her experiences to build your business.
Whether you have a great new startup idea or a long-running business, you’ve probably come to one inevitable fork in the road: financing.
It’s the extra capital you need to take your company to the next level, be it for funding resources, creating a new marketing budget, or securing a deal with an overseas manufacturer. Entrepreneurs in Connecticut know full well the challenges faced as its highly-competitive markets cater to some of the wealthiest income brackets in the country.
Small business owners face particularly unique challenges when it comes to financing—and trust me, I know all about these. I’m a serial entrepreneur who’s been through the wringer having started one of my companies from scratch, growing it, and eventually selling for $1,000,000.
One key financing lesson I’ve learned is that there are many options for entrepreneurs to choose from, each with their own advantages and disadvantages.
So let’s go over some of these finance choices—ranging from 401k rollovers to invoice financing and beyond—to discuss which one is right for you.
Small business startups are already enduring enough challenges—getting new customers, establishing a good reputation, and the list goes on.
Thankfully, there are a number of great ways to fund your business during its earliest stages.
SBA Bank Loans: One of the simplest and common routes to take is a bank loan, specifically through the Small Business Administration (SBA). The government has vested interests in ensuring a vibrant economy and, thus, has allocated a certain number of funds to help out startups. Just remember, you’ll still need a great credit score and significant security (like your home) to qualify.
Grants: Aside from this, there are also grants. Every year, countless private and public organizations offer grants to help innovative or helpful new technologies and services. By visiting www.grants.gov, you can browse many thousands of potential funding sources to give your startup that extra boost.
Crowdfunding: A somewhat unconventional yet burgeoning new option is crowdfunding. Thanks to the internet and websites like Indiegogo and Kickstarter, you can now receive hundreds, thousands, or even millions of dollars through the generous donations of thousands of people from around the world. Even better, since 2016, the JOBS Act loosened regulations so small businesses can promote their stocks for financing on these crowdfunding sites.
Seed Financing: Seed financing, either through startup incubators or some venture capital firms, provide another option. While firms specializing in venture capital generally do not invest in startups, there are exceptions, such as with Accel Partners. Similarly, startup incubators and accelerators are organizations that facilitate the needs of small businesses and can provide financing.
Friends and Family Investments: Sometimes, though, you can avoid the “official” routes and consider investments from family or friends. It may seem unconventional but it’s a totally viable option that could mutually benefit you and the partner. Indeed, securing funding from someone you know personally can actually boost your odds of being invested in from “official” investors, since it indicates your credibility and trustworthiness.
ROBS / 401(k): There's also ROBS, an often overlooked treasure trove in the form of your 401(k) retirement account, which you might have thought was strictly for use after 65 – but think again. I used my 401k to fund my startup business. Here's how I did it.
ROBS—Rollover for Business Startups—allows you to transfer the money from your 401(k) and use it to finance your business’ startup. In order to do this, you must follow these steps:
Create a C Corporation: turn your business into a C Corporation (others, such as LLCs or S-Corps, do not qualify).
Estabalish a 401(k) Within the Business: the company must have the capacity in place for these retirement securities.
Roll It Over: shift your current 401(k) into the new startup.
Regard Your Startup as an Asset: the rolled over 401(k) funds can be invested into assets.
Investment Becomes Capital: the newly-invested money into the C Corporation is now available as capital for financing.
The ROBS financing option for small businesses is a great one to consider when you need that extra lump sum of cash.
Although like all investments this approach could ultimately fail if your business fails, there are some upsides compared to traditional investment options. Specifically, the 401(k) funds are before-tax and no implications exist towards your credit history.
If your company is already established, there are a number of specific financing options that could work for you.
These include invoice factoring and invoice financing (also known as accounts receivable financing). Although there are many similarities between these and their overall functions, specific differences exist that make them uniquely suited in certain scenarios.
Invoice factoring basically allows you to sell outstanding invoices for cash. The invoices are essentially sold to a third-party entity, entering them into an exchange.
In general, you can enjoy roughly 80% of the advance immediately. Plus, you’ll no longer have to waste so much time hounding your clients for unfulfilled checks.
Invoice financing (also known as accounts receivable financing) works by selling your accounts receivable. In turn, those pending payments become cash that can be used for all types of business-related expenses.
Effectively, you are selling an asset, which is much different compared to purchasing a loan. Although some of the mechanics are similar, the key difference is that it doesn’t come with the baggage of “going into debt.”
Your customers and their reliable credit history essentially become an asset you can capitalize.
Companies like Fundbox, for example, offer invoice financing services . The process involves connecting with your business’ accounting software and then divvying up funds to you within your overall credit limit. Funds are generally transferred to you within 1 business day.
One of the key differences between invoice factoring and invoice financing is that in the latter, your company retains more control and privacy – something I know from personal experience. In contrast, the factoring route usually involves a more invasive third-party company that often contacts your clients about payments.
The internet has brought an unprecedented level of innovation and connectivity to the world. With this has come a broad new set of services, including within the realm of financing, referred to as Fintech.
Many reputable services online that offer reliable lines of credit to help fund your business needs. One of the great conveniences with these lines of credit is that they often come with exceptional terms such as to pay back loans within 6 or 12 months after drawing funds from your account. In other words, your full credit available amount remains in your account, but you are only required to pay it off after a period of time starting once the money is taken out.
Additionally, instead of paying interest on the credit, you only have to pay low monthly fees, ranging from 1% to 4%. Applications can be filled online and approvals can be done simply by connecting to your business’ accounting software, such as QuickBooks.
Aside from lines of credit, there is also working capital. As obvious a source of funding as this may seem, it is often overlooked amid the hectic day-to-day operations of a business. Working capital is based on a ratio of currents assets and current liabilities.
Within these variables exist the potential for short-term funding options that may not be immediately apparent yet could go a long way for sustaining your needs.
Financing is necessary for both startups and established businesses. The aforementioned options come with their own unique offerings that could be a perfect fit for your needs.
The 401(k) rollover plan is one of many startup funding options available to aspiring entrepreneurs. Alternatively, invoice financing or factoring can help find wealth within unpaid invoices. With lines of credit and working capital, you can discover even more nuanced business financing options.
As competitive as the business world can be, there are plenty of helpful financing solutions that can bolster your company when you need it most.
Image by PublicDomainPictures from Pixabay
Marsha Kelly sold her first business for more than a million dollars. She has shared hard-won experiences as a successful serial entrepreneur on her Best4Businesses blog, where she also regularly posts business tips, ideas, and suggestions as well as product reviews for business readers. As a serial entrepreneur who has done “time” in corporate America, Marsha has learned what products and services work well in business today. You can learn from her experiences to build your business.
Careful preparation for meetings with the investment community seems as obvious as it is necessary. However, good intentions all too often get sidetracked and key preparations can easily be overlooked. The questions outlined below will serve as a checklist to make sure that every important item is addressed well in advance of your next investor session.
