The Nigerian Exchange (NGX) Limited has emphasised the need for investors to diversify their portfolios and 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 minimise the overall risk of the portfolio.
Divisional Head, Trading Business, NGX, Jude Chiemeka, at the Retail Investors workshop organised by the NGX and ARM Securities Limited recently, said as a multi-asset exchange, the NGX had various products for every investor regardless of their investment goals, risk appetite or return expectations might be.
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 cases where the market takes a sudden U-turn, the likelihood of significant loss of investments is increased.
According to him, the fundamental purpose of portfolio diversification is to minimise the risk on investments, especially unsystematic risk.
He pointed out that this risk of significant loss is further compounded if the stocks belonged to the same sector like manufacturing because any pronouncement or information that affects the performance of one manufacturing stock could also impact negatively on the other stocks in a similar way.
Chiemeka further explained that “If an investor chooses the same asset, he/she can diversify by investing in different sectors and industries.
He listed some of the sectors to explore with exciting opportunities like pharmaceuticals, Information Technology (IT), consumer goods, conglomerates, financial, agricultural and so on, describing MGX as a multi-asset exchange that provides a wide range of asset classes for investors to leverage.
Furthermore, he stated that investors could also add other investment options and assets to their portfolio such as mutual funds, bonds, Equity Traded Funds and real estate.
He also urged investors 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, where index or bond funds are added to the mix provides one’s portfolio with the much-needed stability.
He said 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.