INVESTMENT STRATEGY AND PORTFOLIO REBALANCING

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

The emergence of Omicron variant of the killer Covid-19 is causing disquiet in the global landscape. Barely few minutes of the news break of Omicron’s three cases in Nigeria, Canada swiftly placed the country on the ban list while every country is undergoing minor panic on the arrival of Omicron. Investopedia has identified government’s hold on the free trade market, flow of funds between countries, speculation and expectation as well as demand and supply as major factors that will drive the market as we prep into 2022. These will be reinforced by digital transformation, changes in consumer behaviour, digital offerings and climate change.

Analysts have identified financial institutions, air transport, telecommunication, food beverages and construction as some of the fastest growing sectors. Investment in the securities market is a game of risk and return trade off and investor should understand his investment goal and risk tolerance. This is where investment advisers, called securities dealers become relevant. In Nigeria, keeping money in savings account in expectation of three percent interest while inflation hovered at double digit is negative returns. But there are quoted companies on the NGX that have generated above 12 percent yield, year-to-date in price appreciation alone. Some investors live comfortably on dividend annually while others live on a combination of dividend and capital gains. It is all about the power of market information and sound investment advice on how to maximize returns and minimize risks.

investment in asset classes is an art and science. While some investors adopt buy – and- hold strategy, others trade their securities frequently. There is passive and active investment strategy. The goal of passive investing is to build wealth gradually by buying a security to own it for a long time. This class of investors do not take advantage of short-term price fluctuation to profit from their investment. They believe that the market generates returns over time. This is known as relative returns. Passive investors maintain a well-diversified portfolio through index funds which tracks a target benchmark. But this class of investors face what is called total market risk. This is when the entire market experiences losses. Managers of passive investment are prohibited from realignment of securities even when it becomes clear that some stock will decline in prices. Passive strategy lacks flexibility.

On the other hand, active investment strategy is about frequent buying and selling of securities to maximize profit at every opportunity. The goal is to outperform the benchmark such as the NGX All-Share Index or Standard & Poor’s 500 Index. The strategy entails strive for superior returns by taking greater risk, including payment of huge transaction fees. To maximize returns and minimize risks, portfolio managers follow the market trends, shifts in the economy and changes in the political space. The managers also do in-depth research and market forecasting to keep abreast of frequent changes in the operating environment.

Compared with passive investment strategy, active strategy is vulnerable to greater risk. The strategy is believed to be too expensive as it involves payment to research analysts, portfolio managers and other transaction fees due to frequency of trading. By this passive investment strategy is said to outperform active one. But a combination of both passive and active investment strategies is desirable. Regardless of the investment strategy, every investor should review his portfolio and rebalance it periodically.

Portfolio rebalancing is simply “divesting in underperforming assets and investing in the ones that have potentials to grow”. An average portfolio comprises equity and fixed income securities. The weight of equity, relative to that of fixed income reflects the risk tolerance of an investor. A risk taker’s portfolio shall have higher weight in equity compared with fixed income securities whereas, it is the other way round for a risk averter.

The simplest form of portfolio rebalancing is Calendar rebalancing. It is about analyzing the investment holdings within the portfolio at predetermined time and adjusting to the original allocation at a desired interval. Portfolio rebalancing has three components: Review of ideal asset allocation, determination of the portfolio’s current allocation and purchase and sale of securities to rebalance the portfolio. As the year is rolling to an end, investors should leverage their investment advisers and portfolio managers to rebalance portfolio. The time is now. There are many blue-chip companies whose shares are undervalued relative to the intrinsic values on the NGX. Portfolio rebalancing is the way to generate alpha returns, irrespective of the factors that will drive the global financial market in 2022. Happy new year in advance.

Oni, an integrated Communications Strategist, Chartered Stockbroker and Commodities Broker, is the Chief Executive Officer, Sofunix Investment and Communications