Risk and Reward Are Joined at the Hip:Entrepreneur Investment Strategy #10

6 Jan

When you invest your time, money and efforts into your business, you know there is risk because you cannot control everything that happens around you. Yet, because you believe in yourself and your business idea, and you have knowledge of the market and trends, you take the risk. You expect a good return on your investment.

You probably feel safer steering your own ship than being an employee on board a large liner. Yet, many of your friends and family who have corporate jobs can’t understand how you can stomach the risk. Unfortunately some of them find out their “safe” jobs are cut in a restructuring, so who took the most risk, you or them?

Your reward for risking your capital in your business comes when you collect dividends on top of your salary, and when you sell the business and live off the proceeds. That doesn’t happen when you are an employee.

riskLikewise in investing, risk and reward are joined at the hip. There is no investment without risk, and often, the more return you want, the more risk you have to take. Having said that, diversification of your investments is fundamental to improving your gains and minimizing your losses. Investing smaller amounts over time (dollar cost averaging) may also improve your returns because you spread the risk out rather than purchasing the shares or fund all at once.

On a long-term basis, stocks and equity mutual funds do outperform bonds and fixed-income funds, and cash always earns the lowest return. What is the good in being safe by having cash under the mattress if inflation eats away at the value of that cash every year?

You focus on being smart in business and avoiding mistakes. Do the same with your investments and find fund managers who aim for above average growth while preserving capital. Diversify the types of funds you have so that you aren’t betting the farm on a single strategy. Contact me for more advice on how to do that.