Many Australians own a business. That business may be their largest single investment.
As a result, it is an acknowledged risk, but also a tremendous opportunity to build wealth, both through the revenue it may provide, plus significant capital gain if eventually sold.
The business owner has skill, plus inside knowledge, which can make it a less risky investment for them than for an outsider.
However, it is unlikely that a potential purchaser would have the same degree of confidence. Would an outsider consider investing their entire life savings, (perhaps even borrowing against the family home) to invest in an enterprise controlled by people they do not know personally. Probably not.
The scenario is little different to any investment decision. If a client asks us to invest funds, we must do so with due consideration of the potential risk. If we selected a single company in which to invest, the range of outcomes can be very significant. Unfortunately, some companies fail, or are so mismanaged that their value declines. On the other hand, the company could provide stunning results and result in a massive increase in a client’s capital position.
However, we believe that most clients do not want risk to that extent. An easy way to look at this is to consider a scenario such as below.
I have $2 million in savings. Through a fortunate investment, I double this to $4 million. Unfortunately, a short time later the investment fails and becomes worthless.
The question that must be asked, is how much different would your life be with $4 million instead of $2 million? And how much different with no money at all?
This is a long-winded explanation of why at FB Wealth Management we believe in diversification across asset classes and individual investment.
Diversification significantly reduces the chances of ending up with zero savings. At the same time, it must be recognised that diversification also limits the upside. By diversifying it becomes impossible to have all capital invested in the single best investment. Unfortunately, we have to acknowledge we are not smart enough to pick that winner!