Diversification For the Smart Entrepreneur

05 November 2010, by A. Cedilla

When you talk investing, you’re talking money. Common advice is not to put all your eggs in one basket. That’s called diversification. Diversification does several things:

  • It spreads the risk across several groups of investments so that no one group controls all the outcome. While the ideal is that all the investments are working to get you closer to your goal amount, it isn’t always possible, so you diversify. That way, if something happens to affect one type of your investment, the other types can still provide the support you’re investing for.
  • It spreads the risk according your tolerance level and goals. If safety is your concern, low-risk investment can help. If you want to get out of the country at least once in your life, by golly, you can start saving up for it and let the money grow while you’re working on other stuff (like learning a new language — which is also an investment–and getting your passport processed).
  • It spread the risks across your personal time-line, according to your short-term plans and more immediate needs, and long-term plans and more distant (but still vital) goals. If you’re a new parent and looking ahead, you can already start investing for college even before the baby starts teething. If you plan for a relatively stress-free retirement, money-wise, the earlier you start, the better.

When you’re an entrepreneur, the principle of diversification can take on a whole different aspect in its application.

You invest in things that have a definite lifespan, eg. they break down.
Normally you can easily think of examples, like running shoes for your exercise program, or tires for your car. Common advice here is to change shoes every six months, and rotate tires every X,000 miles, ditching them when they fail the “quarter test”.

What about you? How are you investing in yourself? Pick up any new skills lately, or sharpened old ones? How are you doing there?

What about your business? What are the tools and systems you use to keep your business healthy? How are these things diversified? Any new investments? What are your current ones? What about your future ones? Put your thinking cap on.

Things with a definite lifespan force you to think in really concrete terms. If you know that in X months/years you’ll need to replace Y, you can act with the forewarning and foresight this knowledge gives you.

A lease can be renegotiated for better terms, for example. You can start comparison-pricing for the best quality office equipment you want, and the business courses (you have to fix your schedules,so these count as having defined life-spans) you really need to guide you. You can take better care of what you have from the start, making them last longer and getting more out of them.

You invest in things that grow over time.
Yes, money plays a part too. Interest still works even when you’re sleeping. But what, aside from money, grows over time?

Relationships. As an entrepreneur, you can’t work alone. You really can’t, even though sometimes it feels like you do. You need customers, clients, buyers. You need suppliers, support, peers. You build relationships in the community you live in, among the people you work with, and the ones who enable your livelihood. The stronger those relationships, the stronger your investments, and the higher the returns over time.

You invest in things that leverage your time.
Skills. You don’t have to Six Sigma yourself into compliance, although the cache and certification can’t hurt. It’s what you do with what you know, and how practiced you are at it, and how you keep improving it, that can maximize your personal efforts. And skills can be being good at common things, not just getting certification. There are hundreds of thousands of over-certified people hunting for work today, who are turned away because they’re overqualified for the jobs they’re applying for.

What about being skilled at comparison-shopping, bargain-hunting and food-planning? With these skills, even if you can’t make money, you can still save money.

What about being handy around the house, or having this knack for knowing people who know people? Even if you’re not confident of your plumbing skills (and you can always study one of those DIY-books, or better yet, read the manual, if its applicable), maybe you know someone who knows someone who can fix that damned leaky pipe in the basement in exchange for your accounting skills. Bartering is yet another skill, you know.

Invest in things that increase your tolerance, physically, emotionally and mentally.
When you have your health, you have everything. You bounce back faster. You can go further and focus better. You’re not as stressed, or don’t hit your limits as quickly as before. Exercise, meditation and strong relationships help buffer you against the inevitable problems and storms of life.

Diversification is a very useful course of thinking to apply to short and long-term planning and implementation. Here are a few more things to consider when it comes to applying its principles to your business:

  • As an entrepreneur, what are the risks you try to minimize or avoid the most? Make a list, moving from the general to the specific. So you’re afraid of your business failing. Okay. What about that exactly? How is your business most likely to fail? Least likely to fail? How will you know and in what ways do you believe the weakness/es will be most likely to manifest?
  • Dissect your findings to determine what contributes to these reasons. Ask yourself, why do you think so? Maybe your vision and perception needs refreshing too.
  • What are the goals of your business? How is it most likely to succeed? Least likely to succeed? How will you know? Lather, rinse, repeat.
  • What if you succeed? Will you sell it off? Branch out? Franchise? Time begins to press in. Think ahead.

Thing more globally. Okay, if this doesn’t work out, what else do I have to fall back on? Get into? What can get me to my goal of having a good, successful life with the people I love doing work that challenges me to grow and have fun doing so?

Think wide, think ahead. Diversify.

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