Balancing Business And Investment Risks
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Entrepreneurs tend to have a natural affinity for risk-taking. While carefully calculated, they bet big on their businesses, often going all-in when investing financial resources to start and grow their companies.
“Given this commitment, many entrepreneurs view their business as their ultimate retirement plan. This can be a mistake, because it places all their proverbial financial eggs in one basket,” explains Sheldon Friedericksen, Chief Financial Officer at Fedgroup.
As an entrepreneur, it's important that you consider how a diversified investment portfolio that spreads risk can offer greater financial security, while still delivering robust returns.
“Paradoxically, while most successful entrepreneurs excel at diversification – they often pursue multiple opportunities, or pivot their business to exploit new gaps in the market – their investment portfolios seldom follow suit,” continues Friedericksen.
Exposed to volatility
This inherent appetite for risk means entrepreneurs often also employ a different approach to investing. “Allocations tend to reflect this risk profile, with portfolios heavily skewed towards high risk, high return assets such as equities.”
However, entrepreneurs need to carefully consider their asset allocations, taking into account their business in relation to their other investments. “As the sole or majority shareholder in a business, an entrepreneur already has massive exposure to equity risk, whether the company is listed or not,” says Friedericksen.
It's also important to insulate investment portfolios from the potential impact of stock market corrections. The recent slump in the value of shares in companies that were previously considered mainstays in the portfolios of astute investors and leading fund managers has highlighted the variability in risk inherent in a concentrated equity investment approach.
“Since the start of 2018 a range of blue-chip JSE-listed companies have shed significant value as equities shrugged off positive market sentiment and reacted to weak economic fundamentals and, in certain instances, corporate governance irregularities,” says Friedericksen.
In the face of these developments, he believes that entrepreneurs should ask if they can solely rely on stock investments, especially when the bottom drops out of heavily-weighted shares like Steinhoff?
“While investing in equities has long been considered one of the best ways to achieve above-average returns, in the context of an entrepreneur's risk profile there is always a need to include lower-risk, secure investments in your portfolio to ensure a degree of security and certainty.”
Your capital secured
A suitable option is Fedgroup's Secured Investment participation (part) bond offering, which combines fixed, high returns with capital security. “We created our Secured Investment product to help investors earn a higher level of income than that offered by money market funds, while protecting their capital value.”
Part bonds are a low-risk, high-yield fixed deposit investment fund backed by first mortgage bonds on a physical properties.
This type of secured investment offers predictability with a fixed, guaranteed interest rate for the full term of the investment, allowing for accurate calculations and projections on growth.
“It is also a type of collective investment, which is governed by the same strict regulations as unit trusts and is regulated by the Financial Sector Conduct Authority (formerly the FSB). This means invested capital is secure and protected by law.”
Income or growth
Entrepreneurs can choose to invest for income, as interest earned at the nominal rate of 8.75% p.a. can be paid out monthly.
“Alternatively, investors can choose to invest for growth. By reinvesting the income, investors benefit from the power of compound interest, earning an effective rate of 10.9% p.a. over the five-year investment period,” continues Friedericksen. Investors also have the flexibility to switch from the growth option to the income option without attracting penalties.
What's more, Fedgroup charges no fees on the investment amount, or on the interest earned, so returns aren't eroded. “Our income is earned from the properties we finance and the interest income generated.”
Since launching its Secured Investment offering in 1990, Fedgroup has experienced significant inflows from both institutional and private investors, particularly for lump-sum cash investments. “We are currently managing over R2 billion within our Secured Investment portfolio,” confirms Friedericksen.
“Investing in assets that are counter cyclical to the industry within which entrepreneurs operate, and including more conservative, stable investments like our Secured Investment in a portfolio, is a smart diversification strategy for any business owner. This investment approach mitigates risk and offers greater financial security, which ultimately enables entrepreneurs to pursue a more aggressive business strategy,” he says.
The benefits of investing in a Secured Investment:
- A high-yield, no cost fixed deposit investment
- A low-risk investment that is secured by first mortgage bonds on physical properties and is highly regulated
- Every property investment opportunity is objectively analysed and evaluated against a strict set of criteria, with a maximum of 75% of the asset value loaned for the mortgage
- The fund has close on double the ratio of security (value of the properties) to outstanding loans (value of mortgage bonds), ensuring that investors are well protected
- Offers predictability with a fixed, guaranteed interest rate for the full term of the investment
- Offers flexibility to invest for income or growth to meet specific investor requirements.