Nigerian Exchange (“NGX” or “The Exchange”) Limited has emphasized on the need for diversification of portfolios by investors to ensure enhanced return on investment.
According to NGX, portfolio diversification is the process of investing one’s money in different asset classes and securities in order to minimize the overall risk of the portfolio.
The Divisional Head, Trading Business, NGX, Jude Chiemeka, recently at the Retail Investors workshop organised by the NGX and ARM Securities Limited said as a multi-asset exchange, the NGX had various products for every investor regardless of what their investment goals, risk appetite or return expectations might be, listing the products as equities, fixed income, Exchange Traded Funds and derivatives.
Educating investors, Chiemeka said, “Just imagine what would happen if you invested all your money in a single security. Everything would be great as long as the stock’s performance is good. But in case where the market takes a sudden U-turn, the likelihood of significant loss of investments is increased. The fundamental purpose of portfolio diversification is to minimize the risk on your investments; specifically, unsystematic risk. This is risk of significant loss is further compounded if the stocks belonged to the same sector like manufacturing because any news publication or information that affects the performance of one manufacturing stock could as well affect the other stocks in a similar way.
Mr Chiemeka further explained that, “If an investor choose the same asset, he/she can diversify by investing in different sectors and industries. There are so many different industries and sectors to explore with exciting opportunities like pharmaceuticals, Information Technology (IT), consumer goods, conglomerates, financial, agricultural and so on. Furthermore, NGX is a multi-asset exchange that provides a wide range of asset classes for investors to leverage. Investors could also add other investment options and assets to their portfolio. Mutual funds, bonds, Equity Traded Funds as well as other asset classes such as real estate and pension plans are other investments they can consider. Investors are encouraged to ensure that the securities vary in risk and follow different market trends. A typical example is the general trend where the bond and equity markets have contrasting movements. By investing in both these instruments, investors can offset any negative results in one market by positive movements in the other.
Explaining further, Chiemeka said, “A sound diversification strategy, adding Index or bond funds to the mix provides ones portfolio with the much-needed stability. Also, investing in Index funds is highly cost-effective as the charges are quite low compared to actively managed funds. At the same time, investing in bond funds hedges your portfolio from market volatility and uncertainty and prevents gains from being wiped out during market volatility.”
Chiemeka said “At the NGX, we will continue to prioritise investor education to ensure that investors understand capital market investments and mechanisms, as only then will they be empowered to make sound investment decisions.”