Family Walking Together

Who could have possibly predicted the events and emotional roller coaster of 2020? The past year has served as a striking reminder that nothing is certain. The key is using this wake-up call to build confidence in the current period and future periods of uncertainty.  

As a business owner, you may have felt like you were trying to sprint across quicksand on a daily or even hourly basis. Some days you got caught in the middle, sprinting but getting nowhere. By now, you may have made it to the other side and may even be thriving, but the potential for uncertainty and events outside your control have never been more in focus. 

You realize that while getting to the other side is the battle, being better prepared for future uncertainty and positioning you and your family for financial success in the midst of uncertainty is the war. As a result, many business owners are asking more pointed questions. How can I manage risk given so much uncertainty? Where can I invest to reduce my overall risk? Should I consider doubling down on my investment in the business or look at opportunities outside my current business? What’s the goal of the business for both my family and me, and how can we build an intentional strategy to get there? 

Manage Risk

Central to risk is considering where to focus your financial resources. Business owners often have greater confidence in reinvesting excess cash flow in their existing business and believe it has the potential for the greatest return. However, owners should at least consider other investment options and additional investment criteria that may create better alignment as it relates to their overall financial goals and risk management. 

Prior to making additional investments in the business, step back to collaborate with your spouse and family members to ensure there’s alignment between future needs and wants and the appetite for investment risk. While reinvesting in the business is likely to generate the greatest financial return, it also can carry significant risk. Further, it also may come with the cost of additional stress, more hours spent worrying, and more tossing and turning during the night. Be honest about current stress levels and workload. Consider the effect of further reinvestment in your business and how that might affect the quality of your life compared to building a more diversified investment portfolio. 

Invest with Intention

Many business owners resist investing outside of their own business altogether. They may simply not have considered a reallocation of investment resources, or they may be uncomfortable and lack familiarity with the “market” itself. At times, there’s a feeling that market movements fall in line with their own business cycles. However, part of the idea is spreading the risk from your own company to thousands of companies and pairing it with other asset classes that won’t correlate closely with the stock market or your industry. With this portion of your portfolio, it diminishes the probability of a touchdown but also reduces the probability of a fumble, which may be critical for you and your family’s long-term financial success. 

Companies have been affected different ways over the past year, with some clear winners, some clear losers, and some in between. Through diversification, you can better manage the risk associated with an unexpected event that could significantly affect your business’s particular industry or market. 
This is where taking a portion of your financial assets and investing in a diversified portfolio can make a ton of sense. If you see the value of diversification and wish to pursue this strategy, keep these three things regarding diversification in mind:

  • A diversified portfolio helps reduce your overall investment risk
  • Global diversification reduces portfolio risk and improves return potential 
  • A portfolio can be strategically designed to help you meet your goals

One approach to investing with intentionality is to think about your financial assets in different buckets: 

  • Bucket one: Your business is your livelihood and greatest asset. It’s your best shot at accelerating your wealth but carries tremendous risk. 
  • Bucket two: A conservative investment strategy designed to generate income that will support your expenses. Over time, this will reduce your reliance on the business to fully support you and your family.
  • Bucket three: A more aggressive investment approach. This may be added once the second bucket is full or as a complement along the way.

The approach and implementation will depend on you and your family’s needs and wants, which is why it’s so important to have that collaboration on the front-end. This allows you to build an intentional strategy to create accountability and avoid wasted time, energy, and worry. Having a plan describing where you want to invest excess cash flow will help you better define the strategic direction of your business. Further, it’s important the business and its management team are aligned with your overall financial plans. As investment opportunities inside or outside the business change or evolve, your investment strategy may need to change. However, as you consider such changes, it’s important to keep your overall goals and objectives in mind. Doing so will create and define boundaries and help ensure your investment decisions are more strategic to the overall plan versus being merely opportunistic. 

Build the Right Team

You have likely focused most of your attention on your business and focused less on your personal long-term plans. Involving a team of professionals with the expertise to help you address your personal investment, retirement, and estate planning goals is a critical component. Don’t let any indecision on plans for the company, both now and after you’re gone, put off this planning.

Building the right team can help you avoid the financial quicksand and pitfalls along the way. The right team will hold you accountable while recognizing the plan will need to be revisited and refined as your goals and priorities shift. They can help you measure the milestones, address regulatory and compliance issues, and allow you to focus more of your time and energy on both your business and the other important areas of your life. 

Even business owners who fared surprisingly well over the last year had their confidence in the future shaken. However, with the right approach, mindset, and focus on creating alignment between your business and personal goals, it’s possible to rebuild and increase the confidence you once had. 

Looking for more resources to help you prepare for the future? Visit our BKDnext® page for insight on business succession and continuity planning and our Private Client Services page for insight on financial and wealth management services.

Read all the articles in this series:

For more information on this topic, watch the archived webinar Building a Confident Future with a Holistic Approach

For more information, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.

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