Diversify Or Reinvest?
As an intelligent investor, you know that you need to put that money to work. As a business owner, you’ve probably asked yourself “Should I reinvest my profits, or diversify into other investments?”
Should You Reinvest Or Diversify?
Initially, while your business is growing rapidly, diversification into other assets is probably not intelligent. You’re most likely to get the highest and safest return by reinvesting in your business; in reality making new investments in a system that has worked well for you in the past. It may be very possible for you to receive a 30%, 50%, or even 100% annual ROI in your own business, which is unlikely elsewhere.
Diversifying for the sake of diversity isn’t intelligent! Splitting your money, time, focus, and energy between many different investments leaves you at a disadvantage to other investors who have dedicated years to become experts in that area, similarly to how you were at a disadvantage when you initially got into the business you’re in now.
But ignoring diversification is also foolish. Markets may change rapidly and it’s inevitable that your business will eventually be disrupted as well. Keeping all your eggs in one basket is a good wealth generation strategy, but it’s a poor long-term wealth preservation strategy, even if you watch the basket carefully. No single basket is safe in an environment where one unpredictable algorithm change made by one unpredictable Internet company can bring your business to it’s knees.
So, how should you diversify?
Small. Slowly. One At A Time.
Keep the majority of your profits churning in your main business. Especially in the short term (and potentially in the long term) investments here will provide you the best return. It achieves such great returns with relatively low risk because of your long-term effort, built-up knowledge and strategic de-risking. Your business is the wealth-creation machine you know best and it’s where you can invest most intelligently.
Placing your money in an area where you have less knowledge and are looking to invest less time will probably not bring you the same return without crossing over into speculative territory, putting inordinate trust in others, using excessive leverage, and generally taking higher levels of risk.
Tread with caution when investing beyond your area of expertise. Even if your goal is ‘wealth preservation’ with moderate returns, it’s still possible to lose that money, or a portion of it. All investments must be made intelligently, whether for large profits or wealth preservation, whether inside your core business or with diversified investments.
That’s why you should start diversifying small, slowly, and one at a time.
Small – You are going to learn from your mistakes, so make small ones. Invest to learn, even if that means investing small unexciting numbers that will never generate a return. You can’t earn a lot by opening a stock trading account with $200 (considering fees, you are more likely to lose money) but you can learn a lot with at most a $200 downside. The majority of your profits should continue to fuel your main business, and holding liquid cash is a good short-term option as well.
Slowly – As with your money, continue to focus the majority of your time on your profitable business. Losing focus nullifies your hard-earned knowledge. If an exciting alternative investment steals your focus, it will likely do more harm than good. Set aside defined, limited times to learn about other investing options, but continue to focus your efforts where you have long-term proven success.
One At A Time – Learning a new investment strategy means taking your limited time away from your core business. Learning multiple new investment strategies will take too much time. You’re not likely to gain the in-depth knowledge you need to invest intelligently. Shop around, but pick just 1 new avenue to diversify into.
Once you have built up any wealth worth preserving, you’ll want to begin implementing a wealth preservation strategy that will continue throughout your life.
First, research what other investment vehicles are available to you. (Of course, there are plenty…)
Pick one that fits your lifestyle, desired liquidity, and complexity. A young location-independent digital nomad who wants to keep his options open may not benefit from investing in unmovable real estate requiring a 30-year mortgage and a firm understanding of local property laws.
Second, devote some time to learning how to invest intelligently in that area.
Competency in your main business likely doesn’t apply here so your best investment may be $100 spent of books and training! Maintain the majority of your focus on your core business. When you do invest elsewhere, invest small and invest to learn.
The reason to begin now, rather than later, is because you should not invest big until you have gained some level of competency and understanding. You need experience to invest intelligently and you’ll gain this experience slowly just like you did while learning your current business.
The first goal of diversification is the security that comes from no longer keeping all your eggs in one basket. Your final goal should be to have more than one well-built basket, to gain experience in a new area so that you can intelligently invest and control your money across multiple diversified investments.
One single source of income won’t provide long-term security but neither will a single source of income and a pile of inactive cash or a single source of income and a group of speculative investments.
Long-term financial security comes from multiple sources of income generated by multiple intelligent investments, each of which you know well and each of which you can rely on if necessary.