INVESTMENT STRATEGY AND PORTFOLIO REBALANCING

Sola Oni urges investors to leverage their investment advisers and portfolio managers to rebalance their portfolios

The emergence of the Omicron variant of the Covid-19 killer worries the global landscape. Just minutes after the news of the three Omicron cases in Nigeria was announced, Canada quickly put the country on the banned list as each country experiences minor panic when Omicron arrives. Investopedia has identified the government’s grip on the free trade market, the flow of funds between countries, speculation and expectations as well as demand and supply as major factors that will drive the market as we prepare. in 2022. These will be reinforced by digital transformation, changes in consumer behavior, digital offers and climate change.

Analysts have identified financial institutions, air transport, telecommunications, food drinks and construction as some of the fastest growing sectors. Investing in the securities market is a game of risk and reward trade-offs and the investor should understand his investment objective and his tolerance for risk. This is where investment advisers, called stock brokers, become relevant. In Nigeria, keeping money in a savings account with the expectation of three percent interest when inflation has hovered in double digits is a negative return. But there are companies listed on the NGX that have generated a return of over 12% just for price appreciation so far. Some investors live comfortably on annual dividends while others live on a combination of dividends and capital gains. It’s about the power of market information and sound investment advice on how to maximize returns and minimize risk.

investing in asset classes is an art and a science. While some investors adopt a buy and hold strategy, others trade their securities frequently. There is a passive and active investment strategy. The objective of passive investment is to build up assets gradually by purchasing a security to hold it for a long time. This class of investors does not take advantage of short-term price fluctuations to profit from their investment. They believe that the market generates returns over time. This is called relative returns. Passive investors maintain a well-diversified portfolio through index funds that track a target benchmark. But this class of investors faces what is called total market risk. This is when the entire market suffers losses. Passive investment managers are prohibited from realigning securities even when it becomes clear that certain securities will fall in price. The passive strategy lacks flexibility.

On the other hand, an active investment strategy is to buy and sell securities frequently in order to maximize profits at every opportunity. The aim is to outperform a benchmark index such as the NGX All-Share Index or the Standard & Poor’s 500 Index. The strategy involves seeking higher returns by taking more risk, including paying huge amounts of money. transaction fees. To maximize returns and minimize risk, portfolio managers follow market trends, changes in the economy and changes in the political space. Managers also perform extensive research and market forecasting to keep abreast of frequent changes in the operating environment.

Compared to the passive investment strategy, the active strategy is vulnerable to greater risk. The strategy is considered too expensive as it involves the payment of research analysts, portfolio managers, and other transaction fees due to the frequency of transactions. By this passive investment strategy, we say that it outperforms an active strategy. But a combination of passive and active investment strategies is desirable. Whatever the investment strategy, each investor should review their portfolio and rebalance it periodically.

Rebalancing the portfolio is simply “getting rid of underperforming assets and investing in those with growth potential”. An average portfolio consists of stocks and fixed income securities. The weight of equities, relative to that of fixed income securities, reflects an investor’s risk tolerance. The portfolio of a risk taker should have a higher weighting in equities compared to fixed income securities while the reverse for a risk avoider.

The simplest form of portfolio rebalancing is calendar rebalancing. This involves analyzing the holdings invested in the portfolio at a predetermined time and adjusting the original allocation to a desired interval. There are three parts to rebalancing the portfolio: reviewing the ideal asset allocation, determining the current portfolio allocation, and buying and selling securities to rebalance the portfolio. As the year draws to a close, investors should take advantage of their investment advisers and portfolio managers to rebalance their portfolios. It is now. There are many blue chip companies whose stocks are undervalued relative to the intrinsic values ​​of the NGX. Rebalancing the portfolio is the way to generate alpha returns, regardless of what drives the global financial market in 2022. Happy New Year Ahead.

Oni, Integrated Communications Strategist, Certified Securities Broker and Commodity Broker, is the President and CEO of Sofunix Investment and Communications


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