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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:

• Capital Risk - the loss of a portion of your investment capital on equity investments due to declining prices.
• Capital Default Risk (similar to capital risk) – failure by a debtor to repay the principal on a debt instrument such as a GIC or bond.
• Currency Risk - your investment is in a country whose currency is declining in value.
• Interest Rate Risk - the risk of locking into a long term debt instrument when interest rates subsequently rise or, alternatively, locking into a short term debt instrument when interest rates subsequently decline.
• InflationRisk - loss of purchasingpower due to rising inflation.

How Diversification Can Improve Your Returns Over the Long Term

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.

Allocating Your Assets Among a Variety of Investment Types

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:

• first, a mix of asset classes of cash, fixed income and equity;
• second, geographic diversification which provides a mix of different performing economies and political situations, as well as currency diversification;
• third, within a specific asset type, you could utilize different categories such as government bonds and corporate bonds for fixed income, or using large capitalized equity and small capitalized equity;
• fourth, if you are investing in mutual funds, use a variety of managers with different investment styles.

The Life Cycle of Investing

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.

• As a young investor, your investment strategy can tolerate as much as 75% equity investing, with the balance in cash funds.
• By your 40s you should diversify into a mix of cash, fixed income and equity.
• As you head into pre-retirement, fixed income should make up about 50% of your overall investment portfolio.

Designing Your Portfolio

When designing an appropriate portfolio for yourself, you needtoconsiderbothinternalandexternalfactors.Internalfactorsinclude:

• your risk tolerance
• your investment objectives
• your time horizon
• your needs for liquidity
• your financial circumstances
• your marginal tax rate

External factors that you should take into consideration are:

• outlook for interest rates
• outlook for inflation
• outlook for the domestic economy and global economies
• outlook for your domestic currency
• outlook for national politics
• outlook for federal debt levels.

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.

Image by Gerd Altmann from Pixabay

One of the biggest risks for any small business owner is the possibility of facing a lawsuit or a debt collection from creditors. If you have invested a lot of your personal assets into your business, you may lose them if your business becomes insolvent or bankrupt. Therefore, it is important to take proactive steps to protect your business from creditors before any financial problems arise. Here are some strategies that you can consider to safeguard your business assets and your investment from creditors.

a. The time to protect your business investment from creditors is before any financial problems arise.

If you fail to protect your business assets before you borrow money, incur substantial debt, or encounter significant financial problems, you may be giving your business creditors a better chance of accessing your assets and challenging any future planning you have done.

b. Understand your exposure as a principal of the business.

As a shareholder of the business, your exposure is generally limited to the amount of your investment, including your shareholdings and any shareholder loans you make to the corporation. However, various situations may arise which impose additional liability upon you.

If you have given a personal guarantee to guarantee the debts and obligations of the business, creditors may be able to sue you and attach your personal assets (by way of garnishment or seizure) to cover the amount guaranteed.

As a director or officer of the company, you may also have additional personal liability for such things as unpaid employee salaries, uncollected or unremitted sales or other taxes, unremitted payroll deductions, and breach of contract.

c. Protect your personal assets.

Prior to signing a personal guarantee, engaging in a new business opportunity or agreeing to be a director or officer of a company, you should consider the following strategies:

• If you haven’t already done so, incorporate the business as a for-profit company or an LLC to separate your personal assets from your business’ liabilities, limiting creditor access to business assets only.
• Transfer your personal assets to your spouse or some other party (at fair market value).
• Invest your money in assets which are exempt from creditors’ claims.
• Set up an asset protection trust in a foreign jurisdiction.

d. Protect the company's bottom line.

There are similar steps you can take to protect the profits of your business:

1. Establish a holding company to hold the shares in the corporation. The profits of the business could then be paid on a tax-free basis to the holding company through dividends on the shares. Those profits can be reinvested or loaned back to the business in the form of a shareholder’s loan, which would ensure that cash flow remains unaffected. The business can grant security back to the holding company for repayment of the loan, making the holding company a secured creditor. In addition, the holding company can purchase equipment or land required by the business and then lease it back to the business, at a profit. These assets could then be out of reach from business creditors.
   
   A holding company is a separate legal entity that owns shares in another company, usually the operating company that runs the business. The profits of the business could then be paid on a tax-free basis to the holding company through dividends on the shares. Those profits can be reinvested or loaned back to the business in the form of a shareholder’s loan, which would ensure that cash flow remains unaffected. The business can grant security back to the holding company for repayment of the loan, making the holding company a secured creditor. In addition, the holding company can purchase equipment or land required by the business and then lease it back to the business, at a profit. These assets could then be out of reach from business creditors.

2. Set up a trust. Any shares in the holding company could be transferred to the trust, and any funds paid by the holding company to the trust by way of a dividend would belong to the trust for the benefit of the trust beneficiaries. These funds would not be available to creditors even if one or more of the beneficiaries signed personal guarantees, or have other personal obligations.
   
   A trust is a legal arrangement that allows a person or an entity (the trustee) to hold and manage assets for the benefit of another person or group of persons (the beneficiaries). Any shares in the holding company could be transferred to the trust, and any funds paid by the holding company to the trust by way of a dividend would belong to the trust for the benefit of the trust beneficiaries. These funds would not be available to creditors even if one or more of the beneficiaries signed personal guarantees, or have other personal obligations.
   
   All creditor proofing strategies require careful consideration of taxation issues so as to avoid income attribution problems or the unexpected triggering of capital or income gains. The above opportunities and strategies represent only a sample of what ought to be considered. Each circumstance will offer its own opportunities and restrictions on planning.You should consult with a professional accountant and a lawyer before implementing any of these strategies to ensure that they are suitable for your situation and comply with the relevant laws and regulations.

3. Make a secured shareholder loan to the business secured by business-owned assets as collateral. You will then have a priority creditor claim against those assets if the business defaults.

Do you know what to do if you're involved in an automobile accident? Here is a list of 9 steps you should follow.

It's a nightmare to think about - a roofing contractor working on your house slips and falls off your roof, resulting in serious injuries. You have many sleepless nights wondering if he's going to sue you. What can you do to protect against such risks?

You've invested a lot of time, money and resources into your business - you need to protect not only the business, but also your employees, your premises, your assets and your future. You cannot afford to leave yourself exposed to unnecessary risk. Stinting on your insurance as a means of saving money is false economy - it's a short-term saving, at the expense of future viability.

Determining the Coverage You Need

Do you know what types of insurance coverage your business actually needs? Each industry has its own unique risks and liability issues. It's important to analyze each facet of your operation to determine what could conceivably go wrong, what sorts of hazards your employees and customers may be exposed to (even minor ones), and what different types of policies are available to limit your liability and protect yourself and your business against claims and damages.

In an era when people will sue for just about any silly reason (remember the infamous McDonald's hot coffee lawsuit?), it has become increasingly important to get it right when putting together your business insurance package. You should start by obtaining risk analyses and insurance quotes from at least three insurance agents, preferably agents who have experience with your type of business and are familiar with the inherent risks. Whenever possible, you should insure with a local agent so you can arrange face-to-face discussions about your specific insurance needs - someone to whom you can become a recognizable person instead of just a policy number. Here is a list of the types of business insurance that you should consider in your Quest for Ideal Coverage.

Business Owner's Insurance

Business owner's insurance coverage is like a homeowner's policy for a business. It packages together a number of coverages and the premiums typically cost less than they would if you purchased these coverages separately. A business owner's policy usually includes:

• property insurance (buildings, equipment and inventory),
• business interruption insurance, to cover situations that may cause you to temporarily shut down operations or reduce production,
• casualty protection,
• crime insurance (theft, fraud and destruction),
• liability and product liability insurance,
• vehicle coverage for borrowed or rented / leased vehicles.

This type of insurance is more cost effective for small to mid-sized businesses, and may include much, if not most, of the coverage that your operation requires.

Property Insurance

The business owner's policy may not extend to damage outside of your premises. If you're located in a multi-occupancy building, you may be required to carry additional property insurance as a condition of your lease.

Liability Insurance

Liability insurance insures against claims for damage to property or injury to persons for which you are held to be responsible, including negligence claims, and suits filed by employees injured on the job. Liability insurance policies cover the legal costs and any damages awarded to the claimant.

Product Liability Insurance

Product liability insurance covers you in the event a product you produce causes harm to a purchaser of that product, or any third party. The purpose of product liability insurance is to protect your business against paying legal or court costs for claims arising from such an event.

Professional Liability Insurance

Professional liability (or professional indemnity) insurance protects service providers against claims for negligence, misrepresentation, violations of fair dealing and good faith, and inaccurate or incorrect professional advice. It is required by law to be carried by medical practitioners (malpractice insurance) and legal practices (errors and omissions - known as E&O - insurance).

Vehicle Insurance

If your business owns any vehicles, you are required by law to have adequate collision and liability coverage on all of your commercially used vehicles.

Workers' Compensation Insurance

Workers' compensation provides wage replacement and medical benefits for employees who are injured on the job. In return for receiving workers' compensation, the employee relinquishes the right to sue the employer for negligence. By law, employers must carry workers' compensation insurance for all employees.

How to Save Money on Your Business Insurance

As mentioned earlier, a Business Owner's Policy will bundle a lot of essential coverages into one package, at a lower premium. But remember that you get what you pay for. The cheapest policy may not provide you with the best protection. There are other ways to keep your insurance costs down without compromising the safety of your business and your employees.

1. Increase your deductibles. Increasing the amount of your deductible under each policy will decrease the amount of your premiums. While it will also mean that you will pay more money out-of-pocket in the event that something goes wrong in the future, it will positively affect your cash flow in the here-and-now.

2. Take advantage of group rates through business organizations and professional associations. Many business organizations offer special discounted insurance rates to their members. Calculate the cost of paying the association dues plus what you'll pay with the special insurance rate, and compare that to what you're paying now.

3. Use the risk analyses as a guide to reducing your liability. Remember those risk analyses you obtained from the insurance brokers? They pinpoint the areas of risk in your business. Eliminate or deal with as many as you can, and inform your broker about what actions you've taken. This should help reduce your premium costs.

4. Shop around. Get quotes from several brokers, do some Internet research, and talk to friends and business associates about their insurance coverages. Be informed before you decide.

5. Insure the building, not the land. There is no need to insure the land that the building stands on. The land can't be damaged, destroyed or stolen. Your property insurance should cover the replacement value of the structures only, NOT the land.

Schedule Annual Insurance Reviews

Review your policies once a year with your insurance agent, to make sure you're still adequately covered and still getting the best value for your money. Laws and regulations change, and it's important to be sure that you haven't left a gaping hope in your coverage out of neglect or lack of information. You may have bought new equipment, expanded your operations, hired more employees since you bought your insurance - any of these events can mean your coverages are no longer adequate. Or perhaps you've scaled back your business and sold some assets, in which case you may be over-insured.

Regular reviews are the best way to determine whether your current insurance coverage is still sufficient for your growing business.

Image by Steve Buissinne from Pixabay