The world is truly a global village. Today, it is routine for a bank founded in Lagos, Nigeria, to raise capital in London by issuing Eurobonds and using those $ investment to buy ATMs with software designed in California, built in China and transported on a ship owned by the California Pension fund, licensed in Libera and captained by a Philippine crew.
If you walk to your fridge in Kano and open it, chances are you will find products from Coca Cola of America; if you go to your sitting room, the TV was assembled by Samsung of South Korea with content streaming via DSTV of South Africa. Your Apple iPhone was made in Vietnam, your generator by Honda of Japan, and your wallet has a Mastercard from the US. You are a global consumer of brands and services. You may buy your cocoa drink from Nestle Nigeria Plc; that cocoa is probably grown in Oyo by Nigerian farmers, but it is sold by a company majorly owned by a Swiss firm.
What about your investing?
Do you invest locally or globally? Why is it even important to invest globally? Let talk about two topics: Risk, and Asset Allocation.
Risk is volatility, i.e. a numerical expression of uncertainty. Risk in investing means you are not sure of investment outcomes including safety of invested capital. When you invest in the shares of a single company, you can lose 100% of that investment. What if you invest in two companies? Well, simplistic math says the probability of you losing all your capital falls to 50%. A portfolio of a basket of securities has lower volatility, i.e., less risk than a single holding. So, in investing, the maxim holds, don’t put all your shares in one basket.
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What about asset allocation?
Asset allocation aims to build you a basket that matches your Age, Risk Profile and Investment Objectives. If you are a younger investor, best practices in asset allocations will propose a portfolio to you designed to be overweight in equities than bonds. If you have an aversion to risk, asset allocation will propose a portfolio selection based on fixed income securities.
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The global investor can reduce his investment risk by expanding the available pool of investments to include globally issued securities, and this is done via buying Exchange Traded Funds (EFT), a class of investment securities that offers the diversification effects of Mutual Funds but allow trades to be made during trading hours, unlike Mutual Funds that trade at the end of day using Net Asset Values (NAV). The ETF chosen are all index ETF, meaning they track the performance of that identified index; being passively managed means less management fee.
How do we build the portfolio fit for the 22nd century for a global consumer and investor? In a world of investment complexity, you need simplicity, frugality and impact. it’s simply too expensive and time-consuming to research all stocks and opportunities. With ETFs, it’s now possible to invest in a targeted manner to take advantage of a specific demographic, sector or opportunity.
There are just two types of investment options, Fixed income like Bonds, where the returns are known in advance, and Variable income like Equity where the investment returns cannot be determined in advance. Below are my recommended ETFs for the global investor. Please note all yields are quoted in USD for uniformity.
Global X MSCI Nigeria ETF tracks the return on the Nigerian Stock Exchange’s most liquid 30 stocks. Expense ratio of 0.88% 5-year return of -16.40%.
VETIVA S & P Nigeria Sovereign Bond ETF, tracks the performance of local currency-denominated sovereign bonds in Nigeria. It has dividend yield of 5.78%.
Vanguard Total Stock Market ETF VTI tracks over 3,500 US stocks, the index aims to represent the entire US Equity market with an expense ratio of 0.03% 5-year return of 8.72%, with dividend yield of 2.35%.
Vanguard Total International Stock (VXUS) mirrors the investment return of stocks issued by companies located outside the United States. Total expense ratio is 0.09% with a 5-year return of 2.55%.
Vanguard Total World Stock ETF (VT) tracks well established and still-developing markets, both US and foreign stocks. It has an expense ratio of 0.09%, and 5-year return of 5.85%.
Vanguard Total Bond Market ETF (BND) tracks a wide spectrum of public investment grade securities in the US, with an expense Ratio of 0.04% and YTD return of 3.89%
Vanguard Total World Bond ETF (BNDW) Broad, diversified exposure to the global investment-grade bond market. Expense ratio of 0.06%, YTD return of 3.25%.
Next thing to do is simply select from our table and build a portfolio fit for investment purpose.
E.g., Ade, a 25-year-old seeking to invest for his retirement 30 years from today, can build a portfolio of 80% Variable Income and 20 % fixed Income.
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This portfolio makes Ade a shareholder in every large company in the world; he participates in equity dividends as well as coupons from the US and Nigerian governments. His average cost, if he invested $100, is about .027%.
Do note there are many asset allocation models and investment options also available to Ade. He can select ETFs that pay a dividend, that invest in SME, or even in a specific sector like biotech.