Picture this: You’re sitting in Lagos traffic, stuck on the Third Mainland Bridge, and decide to check your investment portfolio on your phone. As you scroll through the list of holdings, you come across a few stocks you barely recognise. It feels like you’ve just opened a long-forgotten drawer, only to find a mess of mismatched items. You wonder why you even bought some of them in the first place.
Sound familiar? If so, you’re not alone. Many Nigerian investors face the same dilemma, but the good news is that tidying up your portfolio is simpler than you might think. Let’s dive into how you can organise and manage your investments to keep things in shape and maximise your returns.
Where Do You Start?
The first step in organising your portfolio is to consider your investment goals and how your assets fit together. This means looking at your asset allocation – the foundation of successful investing.
Understanding Asset Allocation
Investing is a long-term game, and your portfolio should reflect that. A typical strategy involves a “core” of stocks, mutual funds and bonds, complemented by “satellite” positions in alternative assets like commodities or real estate. The right mix depends on your personal goals, age, and risk tolerance.
For instance, if you’re young and eager for growth, you might lean heavily on stocks, with a smaller portion in bonds. Conversely, if you’re more cautious or nearing retirement, you might prefer a heavier allocation to bonds. Alternatively, you might blend the two approaches for a balance of growth and income.
Example: Alice, a 35-year-old entrepreneur in Abuja, prefers a 70-30 split between stocks and bonds. She focuses on Nigerian blue-chip stocks for growth and government bonds for stability.
Market fluctuations can change the value of your investments, causing your portfolio to drift from its original allocation. This drift can expose you to more risk or limit your growth potential, which is why periodic rebalancing is crucial.
How Many Assets Should You Hold?
Diversification is key to managing risk, but too much diversification can lead to “diworsification,” where your investments overlap and detract from the overall performance, which means that diversification can be overdone. Striking the right balance is essential.
The term ‘diworsification was coined by Peter Lynch in his 1989 book, “One Up On Wall Street”.
The Balancing Act
If you’re just starting with a small amount to invest, like ₦5,000, an investment in the Paramount Equity Fund (PEF) might suffice, offering instant diversification. As your portfolio grows, you can diversify further by investing in other Chapel Hill Denham mutual funds..
A well-diversified portfolio typically includes a combination of mutual funds, and government back securities like Bonds & T-bills and stocks. Review each one’s performance and ensure they’re sufficiently different from one another. Funds that constitute less than 2% of your portfolio should also be scrutinized for their contribution to your overall strategy.
What to Keep and What to Toss
Deciding which investments to keep and which to discard can be challenging. The common advice is to run your winners and cut your losers, but emotions often complicate this decision.
Evaluating Your Investments
When assessing your stocks, consider what’s behind their performance. Ask yourself if their current streak is likely to continue and what potential risks or opportunities lie ahead. If you decide to hold onto a stock, consider setting a stop-loss to protect your gains.
For mutual funds, examine the fund manager, holdings, strategy, and long-term performance. Compare the mutual fund’s returns to its benchmark and peers over a market cycle. A red flag is if a mutual fund underperforms during favourable market conditions for its strategy.
Example: Tunde, an investor in Ibadan, noticed his large-cap growth mutual fund underperformed even when large-cap growth stocks were doing well. After researching, he decided to switch to a better-performing mutual fund.
The Role of Local Investments
Investing in local companies and government bonds can provide stability and support economic growth. Nigerian companies, particularly in sectors like finance, agriculture, and energy, offer substantial growth potential. Government bonds are a safe bet for those seeking steady income. Statistic: The NGX All-Share Index rose by 79% in the last twelve months, highlighting the potential of local stocks.
However, investing locally also comes with challenges, such as economic volatility and regulatory changes. It’s essential to stay informed and adapt your strategy as needed.
Limitations and Drawbacks
While rebalancing and diversification are critical, they come with limitations. Transaction fees, tax implications, and market timing risks can impact your returns. It’s important to weigh these factors and seek professional advice if needed.
Key Takeaways
Assess Your Goals: Start by defining your investment goals, risk tolerance, and time horizon.
Diversify Wisely: Aim for a balanced mix of stocks, bonds, and alternative assets without over-diversifying.
Periodic Rebalancing: Regularly review and adjust your portfolio to maintain your desired asset allocation. Ideally, this should be quarterly, semi-annually or annually.
Local Opportunities: Consider investing in local companies and government bonds for growth and stability.
Evaluate Investments: Continuously assess the performance and relevance of each holding in your portfolio.
Following these steps, you can keep your investment portfolio organised and aligned with your financial goals, maximising your potential returns.
Disclaimer
The content provided by InvestNaija is for informational purposes only and should not be considered professional financial advice. Always consult with a qualified financial advisor before making investment decisions.
