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How To Manage Business Risk
Every investment decision involves some form of risk.
Even hiding money in a mattress or a safe deposit box entails the potential for loss of buying power through inflation or even theft.
Risk is the anticipation of loss. Continue below.
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What if the business succeeded? Therefore, risk should be equated with reward.
The lower the risk, the lower the reward. The higher the risk, the reward should be higher.
In the "Investment and Resource Pyramid" that I always refer to in financial planning, the top in the pyramid is the High Risk category.
It includes long options, commodities, raw land, and venture capital.
The first 2 are for the sophisticated investors that you can become later.
The purpose of this article is to discuss how to manage your risk in going into business or providing capital to promising business ventures.
Business risk management can be a combination of the ff:
1. Minimize your investment allocation, usually 5-10% of your investable funds, while the bulk of your fund allocation goes to Safety and Long-term Growth and Income categories.
When you lose the 10%, you still have the 80% tucked in safety investments. What if the business venture prospered? You can get your money back (exit from the business) and reap a high reward.
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