Not too long ago, the Nigeria Sovereign Investment Authority (NSIA), announced its results for the 2018 financial year. According to the financial statement, “the results show strong performance in a year when many international markets under-performed and the global economy experienced a moderate pace of expansion.”
Lessons Learned
Following the release of NSIA’s financial performance, the mass media went agog with the impressive news. However, there is an aspect of the results that need further scrutiny because it is packed with some teachable elements. That has to do with the fact that NSIA credited the strong performance to its investment strategy. According to a press statement, the investment strategy “proved robust with headline numbers maintaining a favorable trajectory across the three funds – The Stabilization Fund, Future Generations Fund, and Nigeria Infrastructure Fund.”
There is no doubt that 2018 was a challenging year for investment management professionals who had to battle the market volatilities generated by the US Fed’s interest rate tinkering, Donald Trump’s drum beat of trade wars with China and others, the uncertainty of Brexit, among others. It, therefore, would take sound investment strategy to come out on top in such volatile market situations, just like the Nigeria Sovereign Investment Authority did.
What is an investment strategy?
Financial Investment is like a game of chess. It is like going to war; you need a strategy to win the game of the war. Simply put, an investment strategy has to do with the way an active fund manager goes about analyzing what financial assets to buy or sell. It also entails deciding on when to buy or sell the financial assets. This is done by identifying a set of actionable return factors that can be used to generate superior investment performance.
Everyone Needs a Strategy
An investment strategy is a guiding principle that underscores investment decisions. An investment strategy is not only required by fund managers or large corporates like the Nigeria Sovereign Investment Authority; individuals also require to have investment strategies. Investing your money without an investment strategy is like groping in the dark in the world of money management. Having an investment strategy is like having a roadmap that guides you through the investment process. Not only will it guide you through the process, but it will also help you to avoid dangerous detours in the forms of potential investments that may not be right for your investment goals/objectives, as well as investments that are likely to perform poorly in the near future.
Strategy Goes with Objectives
To have or create an investment strategy, you have to have an investment objective. Of what use is a roadmap if you do not know where you want to go or if you do not intend to go anywhere at all? Investment objective tells you where you are going while investment strategy takes you there. So, make your investment objective actionable and quantifiable. A typical example is: I want to make a return of 8% on my stock investments this year. Such a statement is much more quantifiable and actionable than saying, I want to get rich this year. By quantifying your investment objective, it makes it easier to measure your performance towards the objective or lack thereof. Once you have decided on your objective, you can then arm yourself with your roadmap; the investment strategy which will guide you towards where you want to go.
Like the game of chess, like war, and like every journey, many roads can lead you to your destination or planned outcome or objective. The road map may take you along different routes, some of which you may willingly want to avoid because of past experience or perceived danger. In the same way, there are different investment strategies that can lead you to your investment objective but the choice is yours. Here are some of them:
Value Investing Strategy
This strategy entails looking for and finding undervalued stocks that one can buy at cheaper prices. Though finding such stocks involves a lot of painstaking and time-consuming research on company fundamentals, if found, you should be patient enough to wait until the prices revert to profitable levels before selling them. This strategy appeals to buy and hold investors more than it does to daily traders.
Income Investing Strategy
This strategy entails investing in securities with a history of consistent payout of returns like dividends/interests. Fixed income securities like bond investing are the best-known way of engaging in income investing strategy. Dividend stocks also provide exposure to this strategy. This strategy is best for retirees and those with low-risk appetite. It appears to be the strategy used by the Sovereign Wealth Authority.
Growth Investing Strategy
Growth investing strategy entails investing in stocks of companies that have or exhibit growth potentials. It is suitable for those looking for capital appreciation rather than a steady stream of income. Unfortunately, the shares of growth-oriented companies appear to be expensive because of the upward potential and as such their price to earnings ratio or price to book ratios seem to be high. This strategy is more at peace with investors with higher risk appetite and the patience to wait it out.
Socially Responsible Investing Strategy
With many people showing their love for the environment and their dislike for some social vices like smoking, alcoholism or pornography, a new investing strategy has come out to be known as socially responsible investing strategy. This strategy enables those who do not want to invest in certain sectors of an economy to be able to invest without violating their norms or beliefs. Such investors can invest in the likes of sukuk bonds, Halal or Islamic compliant investments or green bonds for those that are disposed to the preservation of the environment and fight against global warming
The Choice is Yours
The above is a list of some investment strategies for your consideration. The investment strategy you decide to choose will depend on your “financial or investment chemistry”. Before you chose though, try as much as possible to ask yourself the following questions:
- What is my risk appetite or tolerance level? In other words, what amount of risk am I willing to accept?
- What is my investment time horizon? This is important because your time horizon will determine your patience and how long you are willing to wait before cashing out on any profits.
- What returns am I wishing to achieve? Again, this is important because the higher the expected return, the riskier the investing strategy you may wish to choose.
- What funds do I wish to put into this investment? If you decide to put your emergency fund into an investment, for example, you will most likely use an income investing strategy as that has the least likelihood that you would lose your capital. It is very much unlike growth investing strategy which seeks capital appreciation and has a higher risk of loss.
