Today’s tough economic climate has made it difficult for many businesses to wisely invest their money. The pandemic has had catastrophic effects on many economic sectors, especially restaurants and hospitality businesses. The stock markets have fluctuated, and the unemployment rate has been significantly worse than it was during the Great Recession of 2008. Having a strong investment portfolio can help companies survive economic downturns, but many companies do not know how to build one.
Anthony Munchak, a corporate portfolio management specialist, explains how companies can build solid portfolios that will help them weather economic storms and recover from COVID-related downturns in their profits.
The Basics of Constructing a Business Investment Portfolio
Business investment portfolios should be constructed along the same lines as portfolios built for an individual. They should contain a mix of different types of investment from stocks and bonds to real estate. Risk should be carefully managed, along with the amount of funding that each business should place in each type of investment.
Businesses have a larger pool of investment money than most individuals, so when it comes to investing, they have more options. They can also invest in other businesses directly or through private equity.
Above all, a business should not invest too deeply in one industry or one type of stock. Just as it would be a bad idea for a personal investor to tie up all of their money in one type of investment, it is unwise for a business as well. A skilled financial planner can help a company cut through the noise and take out the element of emotional attachment to a particular type of investment.
Here are the advantages of a well-balanced business portfolio:
When a business portfolio is well-balanced, it will be insulated against the effects of market swings. The pandemic has caused a great deal of insecurity in the markets, but certain types of investments hold up better in turbulent times.
Investments with low-risk potential are sometimes looked down upon by forward-looking businesses, but every portfolio needs a solid base upon which to build.
Taking Appropriate Risks
While stability in a portfolio is good, businesses also need to take advantage of the opportunity to make money by making investments with an appropriate level of risk. A CFA charter holder like Anthony Munchak can help a business navigate the process of choosing higher-risk investments.
Balance of Liquidity
A business’s investments should be balanced between highly liquid investments like cash and stocks and more long-term investments like real estate. Putting too much money into real estate can be risky because it is harder to shed these properties during certain economic conditions.
There are more variables in real estate investment than many companies are willing to deal with on a regular basis. If a manager prefers, they can choose a Real Estate Investment Trust (REIT) which treats real estate investments like stocks, making them easier to buy and sell than traditional real estate investments.
It is also a good idea to think about investing outside your company’s country of origin. While one country’s economy may be caught in a recession, another may be experiencing a period of strong growth. Balancing your portfolio with international holdings is an especially good idea if your company has plans to do any work outside the country.
Problems to Watch Out For
Every investor has at some point felt personally moved to buy a particular stock. Perhaps they have heard good market news about it, or perhaps they have come to know about its growing stake in the market.
Investing too much money in any single security can be dangerous. It is certainly possible to put money into a banner stock, but make sure that this investment is backed up by a lower-risk purchase. The swings in price are especially severe with new stock or in a part of the economy that is experiencing a boom.
Though most advisors would caution against an unbalanced portfolio, this does not mean that an investor should never take any risks. With a fixed-income portfolio, a company would miss out on a great opportunity to increase its worth.
Over-diversifying a portfolio by choosing purportedly low-risk stocks that you don’t know anything about can also be a bad idea. Even if you are ranking an investment as a low-risk option, you should thoroughly research your purchase. This is where a good investment management firm comes in. The expertise provided by a good investment management firm can stop you before you make mistakes that could lead to a significant loss of money in the market.
Investing in Other Businesses
Businesses may be interested in investing in or outright buying other companies. While this transaction is more under the purview of a mergers and acquisitions specialist, partial ownership with a controlling stake can be a great option for a company with high financial ambitions.
Making a bet on a company can be expensive, and the investor must always make sure that they are protected in case of failure. This type of investment is inherently risky but may be worth the effort, especially if the other company is in a high-growth sector.
Weathering Market Storms
A healthy and balanced portfolio can help any company solidify its financial position. Businesses need to be aware that some level of risk has to be accepted in order to make a profit on their investments. By diversifying their business portfolios, up-and-coming companies can secure their financial future while allowing the opportunity for strong growth.
Anthony Munchak encourages all business leaders to look into the different ways that they can build their portfolios for a prosperous future. Since choosing a portfolio can be a high-risk proposition, it is best to engage the services of a professional advisor like Munchak who will be able to walk you through all of the potential consequences of your actions.
Interesting Related Article: “Five Small Investment Mistakes To Avoid“