Gregory S. DuPont
Business Owners; Avoid Putting All Your Eggs in One Basket
We all know the old adage, “never put all your eggs in one basket.” Well, too often, business owners may do just that. However, not only is another saying, “variety is the spice of life,” true, but diversifying into a variety of investments also makes sound financial sense.
If you are like some business owners, you may have the tendency to let your primary investment be the equity you hold in your company. Because this limits your investments—by having too much money invested into one area—it also increases the chance of risk. You may consider the possibility of lessening this risk by diversifying some of your non-business equity away from the stock of your business and into mutual funds. It may be prudent however, to maintain approximately six months of expenses to provide for emergencies and opportunities.
Mutual funds offer a convenient way to purchase stocks and bonds and afford you the opportunity of making transactions via mail or telephone. An added appeal is that mutual funds are managed by professionals.
Low risk often means lower potential returns while high yields also run higher risks. You will need to determine the amount of risk you can afford to shoulder. Various considerations need to be factored into that determination, one of which is time: The more time you have to keep your money invested, the more risk you may be able to afford.
Investing in mutual funds requires you to understand that returns and principal values of the funds will fluctuate due to market conditions. When shares are redeemed, they may be worth more or less than their original cost.
Asset allocation is important to investing wisely. It means that you divide your money among an array of investments. This diversification may help to offset losses when one sector of the market performs poorly.
Mutual funds are particularly conducive to diversification because your fund may invest in bonds, stocks, or money market investments. They allow you to allocate assets by switching among your particular fund’s “family” of stock funds, bond funds, or money market funds.
An Important First Step: Read the Prospectus
Reading the prospectus is a primary step toward wise investing. It provides you with a wealth of information such as: the expenses of the fund; its history of performance; fund objectives; financial statements; and the background of the managers. The information provided by the prospectus can help you make more informed choices.