Balancing Risks and Rewards

Risks Rewards Buttons Show Roi Or PayoffCompanies of all sizes seek to maximize their returns to their owners and shareholders while minimizing their exposure to risks. Since these principles also apply to the investment sector, an organization’s senior leadership team (SLT) can borrow some techniques from money managers and other financial strategists.

One of the basic principles of sound long-term investing is diversification:  constructing a portfolio of different assets, such as stocks, bonds, real estate or commodities. The mix of assets in the portfolio will vary, based on an individual’s or institution’s desired return, tolerance for risk and other factors. Diversification can reduce the portfolio’s volatility or “beta,” smoothing out the ups and downs of the stock market. At the same time, the portfolio may include higher-risk assets that have the potential to generate higher-than-average returns or “alpha.”

An experienced financial planner or wealth manager can help investors achieve their goals by building a portfolio that opens the door to desired returns without excessive risk. That’s a more challenging task that it seems on the surface, since there appears to be greater volatility in the global financial and economic environment, as well as a higher correlation between different types of assets.

However, the key takeaway for organizations—as well as individuals—is that seeking returns and minimizing risks are two very different objectives that may conflict with each other. As a result, some high-net-worth investors are separating those goals, perhaps engaging one wealth manager to focus only on return-seeking assets like stocks and commodities, and another to concentrate on risk-minimizing strategies like holding inflation-protected fixed-income bonds.

From an organizational standpoint, the same type of dual strategy could well be applied within the C-suite. For instance, several members of the SLT could be named to a task force or committee that is charged with seeking new financial opportunities for the company. That provides them with a clear mandate to focus on return without worrying unduly about risk factors. Meanwhile, a second SLT task force or committee would take a different approach, looking at potential risks for the organization, and developing strategies to minimize those issues.

Then, the “alpha” team would present its return-seeking recommendations, while the “beta” team would filter those strategies on the basis of risk. Ideally, the result would be a clearer—and faster—identification of opportunities and challenges, allowing the entire SLT to move forward quickly with strategies designed to balance risks and rewards.

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