Achieving the Right Balance of Risk and Return in Corporate Investments
When handling corporate investments, CFOs often face the balancing act between risk and return. Striking this balance is key to ensuring a company’s growth while protecting it from financial shocks. Here’s a practical look at some key strategies to help you maximise returns while managing risk effectively. Each principle is grounded in real-life practices that have proven successful for many organisations.
Know Your Comfort Zone for Risk
Before diving into investments, have a clear discussion with your board or executive team about your company’s tolerance for risk. Are you comfortable with a higher risk of achieving higher returns, or would you rather stick to safer, steadier investments?
Setting this level upfront will guide your choices and help avoid confusion or misalignment later. For instance, if your company is a startup or in a high-growth phase, you might tolerate more risk, as higher returns will fuel expansion. On the other hand, a more established company may prioritise steady returns to support predictable growth. Regular check-ins on your risk tolerance are also helpful, especially when market conditions change.
Diversify Your Investments Wisely
Effective diversification isn’t about spreading funds thin across every possible asset; it’s about strategically placing your money where it can perform best while reducing risk. A diversified portfolio includes a mix of asset classes like equities, bonds, real estate, and maybe even international investments.
A South African company heavily invested in local industries found itself vulnerable to fluctuations in the rand. By moving a portion of its investments into offshore assets, the company was able to stabilise its portfolio when the rand weakened. This approach added stability to their returns and prevented their cash flow from taking a hit during currency fluctuations.
When diversifying, think about your company’s cash flow patterns and exposure to local economic factors. This will help you choose a mix that’s both protective and growth oriented.
Use Data for Smarter Decisions
The power of data can’t be overstated. With advanced analytics tools, you can gain a real-time picture of how each investment is performing. Monitoring trends, predicting risk factors, and running financial models can give you insights that make decision-making more grounded and informed.
By using predictive analytics, you can see how different investment choices might play out under various scenarios. Suppose the economy takes a downturn – would your current portfolio remain balanced? Or if interest rates rise, how would your investments respond? A solid data-driven strategy allows you to anticipate these changes and adjust quickly, keeping the risk/return balance in check.
Keep Enough Liquidity for Flexibility
Liquidity is key for keeping your investment portfolio flexible. Locking up too many funds in long-term investments might sound appealing due to high returns, but if your company suddenly needs cash, you could be in a bind.
A good rule of thumb is to keep a portion of your assets in short-term, liquid investments, such as money market accounts or short-term bonds. This way, if an opportunity arises or you face unexpected expenses, you won’t have to sell long-term investments at an inopportune time.
Consider an example where a local business in South Africa kept a portion of its cash in easily accessible, liquid assets. When a sudden market opportunity opened, they were able to jump in quickly, capitalising on an investment opportunity that wouldn’t have been possible if they’d locked away all their funds.
Think Beyond Market Trends
For CFOs in South Africa, understanding broader economic and regulatory factors is crucial. Local policy changes, new tax laws, exchange rate shifts, and interest rate adjustments can all impact your investment’s value.
A practical way to manage this is by keeping an eye on relevant news and policy changes that might affect your investments. Suppose the South African Reserve Bank raises interest rates. In that case, bonds or other fixed-income investments may become more attractive, while some equities might see decreased demand. A nimble strategy that considers these factors will help you protect returns even when the market changes.
Review and Adjust Regularly
The investment landscape isn’t static, so your portfolio shouldn’t be either. Regularly scheduled reviews – think quarterly or biannually – help you identify any underperforming assets or notice when your risk level starts to skew off balance.
This routine check-in also gives you a chance to rebalance if necessary. For example, if a particular asset has performed exceptionally well, it may now make up a larger share of your portfolio than initially intended, potentially increasing risk. By rebalancing, you can lock in those gains and redistribute funds across other investments.
Seek Expert Advice When Needed
Some investment decisions require specialised knowledge. For instance, if you’re considering international investments or specific sectors like renewable energy, it can be invaluable to bring in an advisor with experience in those areas.
In a true-life scenario, a company wanted to invest in high-growth tech stocks but didn’t have in-house expertise. By consulting an external investment advisor, they received insights into market trends, company fundamentals, and timing strategies. This guidance allowed them to invest confidently, knowing they had the right information to support their decision.
To Wrap Up
Achieving an optimal balance between risk and return doesn’t have to be overly complicated. With clear goals, smart diversification, data-driven choices, liquidity, attention to the broader picture, regular adjustments, and expert input, when necessary, you’re setting your company up for success. And as a CFO, it’s about creating a strategy that grows with your business while staying responsive to changes – ultimately supporting long-term stability and sustainable growth.