Diversification can make entrepreneurs more resilient

Source | Linkedin | Min Lan Tan | Group Managing Director, Head APAC Investment Office, CIO Wealth Management

Putting all your eggs in one basket can be a great way to generate wealth.

Many entrepreneurs have created large fortunes by concentrating their energy and financial resources on building up their business. Add the fact that most entrepreneurs are natural risk-takers, and it can be tough to convince them of the merits of diversification.

But diversification is far from being a sign of investment indecision.

While financial assets do not always match returns from the most successful businesses, owning a broader portfolio often makes entrepreneurs more resilient and may even contribute to the performance of their operating business.

After all, the best ways to preserve wealth are not necessarily the best ways to create it.

Looking beyond one’s business

Even the best-run businesses can fall on hard times – often through no fault of the company’s founder or management. A case in point is the simmering trade conflict between the United States and China which, along with slowing Chinese economic growth, has had a chilling effect on many Asian businesses. This has led to significant wealth reductions for some entrepreneurs. In Singapore, for example, five people lost their billionaire status last year, an 11 per cent decline, while the number of Chinese billionaires declined by 16 per cent, according to Wealth-X.

Aside from such geo-economic risks, companies are also exposed to operational threats that are outside of their founders’ control. Industrial accidents or the collapse of a major supplier or client, for instance, can lead to big losses. Entrepreneurs often bounce back from such setbacks, but holding uncorrelated assets certainly helps with starting all over again.

Even the best-run businesses can fall on hard times – often through no fault of the company’s founder or management.

This is a message to even young and confident entrepreneurs. Set these potential pitfalls next to the advantages of holding at least part of their wealth outside their business. A financial portfolio can provide an extra source of cash income. It can benefit their business too. Entrepreneurs who rely entirely on their business to finance their lifestyles can be caught off-guard by unforeseen circumstances, and end up making decisions that extract cash flow from their operating assets to the detriment of long-term business growth.

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