The term ‘balanced investment strategy’ is used to describe a way of balancing risk and return through portfolio allocation and management.
This method of portfolio allocation is split between fixed income securities and equities.
A balanced investment strategy could also generate income, opportunities for growth, and potential for diversification. In this section we look at the three main aspects of this portfolio allocation method.
Balanced fixed capital investment
The most obvious and most easily quantified part of an investment strategy tends to be the fixed capital investment (money that is invested in assets of durable nature for repeated use over a long period). It is also the easiest to raise finance for, since some level of investment can be secured against these capital goods.
For this reason, fixed capital investments receive an undue share of attention when it comes to raising finance. This can result in an unbalanced investment strategy which under-utilises investment in productive capacity.
Under-investment in invisibles (e.g. skills, market development or product development) means there is an insufficient skill to make full use of the investment or insufficient market development to keep it fully occupied. Under-investment in working capital (the cash available for day-to-day operations of an organisation) means no cash to purchase the inputs required to feed it.
As with most aspects of enterprise management, a good investment strategy is about balance, harmony, and synergy. It is better to do a small amount well and thoroughly, rather than a large amount in a costly and unbalanced fashion.
Similarly, you should phase the investment strategy in a way that’s easy to manage by the organisation and is suited to its growth pattern. This requires a balanced strategy over a period of years.
Long-term planning helps minimise mistakes that often occur when enterprises allow their investment strategies to be dictated by reaction to individual investment requirements. Such investments often reveal a further weakness elsewhere instead of increasing productivity, which means the business realise little or no return on the employed capital.
Varied sources of capital
An enterprise needs to spread its sources of finance across a range of options in order to ensure that it does not fall under the control of an outside organisation. Balancing the sources of investment is as important as balancing its use across the enterprise and across time.