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Monday, June 25, 2012

Balancing Investment Goals vs. Constraints


In our previous blog, your new business is successfully off the ground. Sales, profits and cashflow are growing. You are reinvesting in your business to support future growth. You have decided to invest some of your cash outside of your successful business, diversifying your family’s wealth.

This process can be viewed as “opportunity management” because its goal is to maximize your positive alternatives if your company experiences a serious challenge.

Your investment possibilities are almost limitless. I suggest judging each one against your goals and constraints. Draw up a list of your goals and constraints, change them as your experience and learning grows. Decide on what you want because you know what is best for you and your family.

Goals
Constraints
Return
Safety
Liquidity
Expected investment term
Unrelated to current business
Personal time involvement
Taxes
Limited investment funds

Return vs. Safety
Your successful business should be generating your highest return on investment (ROI) because it is your operating business. It can be 15% to 50%, depending on its age and size. This investment’s expected ROI is lower because its goal is to add a safety element to your investment holdings.

Safety should be a primary concern. What is the point of this exercise if the investment is lost?

Liquidity
Some investments (CDs, stocks and bonds) can be sold and converted to cash in a matter of days, while others (real estate) can take months to market and sell. Having liquid assets on hand for unexpected expenses is recommended. If this has been met, investments that are illiquid can make sense.

Expected investment term
Matching your time frame with an investment’s expected term is crucial to a positive experience. Real estate investments may require 5 to 20 years to reach full maturity. Stock and bond portfolios should be allowed to experience a full economic cycle, 5 to 10 years.

Unrelated to current business
The investment should not be correlated to your current business. If your business declines, hopefully this investment will be growing.

Personal time involvement
Your time is your most precious commodity; your new business succeeded because you added the value. How much of your time will the new investment require? If it is substantial, will it impact your current business?

Taxes
IRAs and taxable accounts impact tax efficiency. IRAs and other tax deferred accounts lend themselves to capital appreciation opportunities. Tax-exempt investments may be ideal for taxable accounts.

Limited investment funds
Investment offerings may have high minimum investment amounts. Consider the planned investment amount against your net worth. You may not want a large percentage of your net worth in any one investment, aside from your first business.

Conclusion
Many issues should be considered before any investment decision. Ask your investment adviser to help you look at the issues related to each investment. Have him/her to describe the conditions in which the investment can do well and the conditions in which they might fail.

This investment’s purpose is to benefit you and your family. Knowing its possible profit and loss conditions can help you make a better investment decision.

We have not covered all possible viewpoints. We invite you to comment and add to the discussion.

Next
We’ll discuss possible investment alternatives and their pros and cons.

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