retirement planning calgary

Beyond the Business: What to Diversify within the Family Enterprise

There comes a point when every family steward must ask how to best diversify their family’s wealth beyond the family business. This question serves as a way to safeguard their financial future and successfully navigate the ever-changing economic landscape. But this all goes beyond mere financial prudence. It’s about securing a lasting legacy that transcends generations.

Consider the Johnson family of Johnson & Johnson fame, who, for generations, built their wealth through a thriving manufacturing business. With time, they recognized the need to extend their financial reach beyond the factory floor. The decision to diversify their assets into various investment avenues, including real estate, private equity, and stocks, has not only protected their wealth but multiplied it. Their success story underscores the enduring strength that comes from venturing beyond the family business.

All of this begs the question: How does one diversify their family’s wealth? Unfortunately, there is no one clear answer for this. Each family simply requires a different strategy built on their unique assets, personalities, values, and so forth. However, there are a number of different types of assets that contribute to your investment portfolio. Below, we break down both private and public assets to support you in your own diversification conversations.

Exploring Private Assets

Private assets encompass a diverse category of investments that are typically not publicly traded on stock exchanges. These assets are often characterized by their limited liquidity and exclusivity and involve several key components:

  • Real Estate: Real estate is a prominent private asset class that includes investments in properties such as residential homes, commercial buildings, industrial spaces, and vacant land. Families often venture into real estate as it can provide rental income, potential for property appreciation, and a hedge against inflation. Diversifying into real estate, as in the example of the Johnson family, can create a steady stream of income and contribute to long-term wealth preservation.
  • Private Equity: Private equity involves investing directly in private companies or acquiring a significant ownership stake in non-publicly traded firms. These investments are typically made with the aim of helping these companies grow and eventually realize a substantial return on investment. Private equity investments may include venture capital for startups or buyouts of established businesses. While they often require a longer investment horizon, private equity investments can yield substantial returns when successful.
  • Private Debt: Private debt involves lending capital to non-public entities, which can include corporations, partnerships, or even individuals. Private debt can take various forms, such as loans, bonds, or notes. Families can diversify into private debt by becoming lenders to businesses seeking capital. Private debt investments may offer fixed interest payments and can be structured to fit the family’s risk tolerance and income needs.

Private assets appeal to families seeking diversification because they often have a lower correlation with public markets, potentially reducing overall portfolio risk. These investments typically require a longer-term commitment, limited liquidity, and a higher degree of due diligence.

Public Assets and Liquid Securities

Public assets and liquid securities represent a category of investments that are traded on public markets, making them readily accessible and tradable by investors. They are characterized by their liquidity, which means they can be quickly bought or sold on stock exchanges.

Public Assets
Public assets are investments that are traded on public markets and are accessible to a wide range of investors. They include:

  • Stocks (equities): Stocks represent ownership shares in publicly traded companies. When an individual or family owns stocks in a company, they become shareholders and have a stake in the company’s profits and losses. Stocks are known for their potential for capital appreciation, as the value of shares can increase over time. They are also associated with dividend payments, which provide a portion of the company’s earnings to shareholders. Families can diversify their portfolio by investing in a range of stocks across various industries and sectors.
  • Bonds (Fixed-Income Securities): Bonds are debt securities issued by governments, municipalities, corporations, or other entities. When an investor purchases a bond, they are effectively lending money to the issuer in exchange for periodic interest payments and the return of the bond’s face value at maturity. Bonds are known for their income-generating potential and relative stability compared to stocks. They can be an essential component of a diversified portfolio, providing income and acting as a hedge against stock market volatility.

Liquid Securities

Liquid securities are financial instruments that possess a high degree of liquidity, allowing investors to easily buy or sell them on public markets without significantly impacting their market value. These securities are readily tradable, making them a crucial component of a diversified portfolio for family enterprises. They include:

  • Common Stocks: Common stocks represent ownership shares in publicly traded companies. They are highly liquid because they are actively traded on stock exchanges. Investors can buy or sell common stocks through brokerage accounts with ease. Common stocks are characterized by their market prices that fluctuate throughout the trading day based on supply and demand. Investors often buy common stocks with the expectation of capital appreciation and may receive dividends as a share of the company’s profits.
  • Preferred Stocks: Preferred stocks are another form of equity investment but come with certain preferential rights, such as a fixed dividend rate. Like common stocks, preferred stocks are typically traded on public markets and offer liquidity to investors. Investors can trade preferred stocks to capture price movements or enjoy steady dividend income.
  • Corporate Bonds: Corporate bonds are debt securities issued by corporations to raise capital. They promise to repay the bondholder’s principal amount at maturity and provide periodic interest payments, known as coupon payments. Corporate bonds are traded on bond markets, offering liquidity to investors. The bond’s market price may fluctuate based on changes in interest rates and credit quality. Investors may buy or sell corporate bonds to manage their portfolios or capture price opportunities.
  • Government Bonds: Government bonds, issued by governments at various levels (federal, provincial, or municipal), are highly liquid fixed-income securities. They are considered one of the safest investments because they are backed by the issuing government’s credit. Investors can easily trade government bonds on bond markets, making them a valuable choice for income-oriented investors seeking liquidity and stability.
  • Exchange-Traded Funds (ETFs): ETFs are investment funds that hold a diversified portfolio of assets, such as stocks, bonds, or commodities. ETF shares are traded on stock exchanges, providing investors with an efficient way to gain exposure to various asset classes. The intraday tradability of ETF shares makes them highly liquid, and they are an excellent tool for diversification and liquidity management within a portfolio.

Public assets, including stocks and bonds, as well as liquid securities, are, in essence, instrumental in asset allocation strategies for family enterprises. These assets offer a host of advantages for a diversified investment portfolio. Their versatility and accessibility enable families to navigate the complex financial landscape, making more informed decisions that safeguard and enhance their wealth across generations. These also provide liquidity, diversification opportunities, and the potential for both income and growth, allowing family enterprises to effectively manage risk and pursue their financial objectives.

Diversifying the family enterprise and moving beyond the confines of the family business is not just a financial strategy; it's an intentional step toward securing a lasting legacy. It's about striking the right balance as you diversify, leveraging the gains and risks of both private and public assets. Now’s the time to ask: How are you diversifying your family’s wealth beyond the family business? Reach out to the Beacon Family Office, and we’ll help you find your answers.

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