Diversify to Mitigate Risk

Small business owners may find that most of their net worth is tied up in their business. But what happens if your business takes a downturn? This can happen if, for example, your business’s market sector experiences a decline. Diversification is the key to reducing risk to your personal and business wealth.

Be Cautious with Investments

If you reinvest all your profits back into your business, you aren’t protected against a reversal of fortune. Similarly, if the investments you choose for your portfolio are in the same sector or industry as your business, any downturn will affect them as well. To diversify and reduce risk to your net worth, choose investments that are in different industries from your business. That way, if your business suffers a decline, you’ll have unrelated investments to help protect against losses.

Diversify Your Business

Consider strategies that expand your business’s operations into new products or markets and complement your current offerings. By expanding into an industry that is related to your existing operations, you will be able to leverage your existing resources and expertise. If you have excess resources or capacity in your current business, you may also want to take advantage by entering a new market or industry that is unrelated to current operations but shares similar characteristics.

Reasons for Diversifying

Diversifying helps you build wealth and reduce risk by ensuring that your revenue is not tied to a single product or service. When you diversify, you can spread investments across a wide range of products, services, markets, industries and geographical areas. Diversification can help you take advantage of emerging trends that may expand your customer base. It can also protect your business against market downturns and changes in consumer preferences.

Diversification Pitfalls

Building wealth takes a dedicated effort on the part of the business owner. It requires a steady investment of time, money and resources, so make sure you weigh the potential cost against the benefit you’re likely to receive. Spreading your resources too thin may cause you to lose focus on your primary business. While staying ahead of competitors is a worthy goal, be certain your existing operations are your priority.