Diversifying investment portfolio means having a mix of different investment types of financial assets.This is done for the purpose of maximizing returns and keeping risks at their barest minimum.
By Diversification, we mean it is necessary to invest in a wide range of financial instruments cutting across different sectors.
This is largely due to changing governmental policies, competitive business environment, unstable prices, foreign exchange fluctuations and many other challenges that can make an otherwise profitable venture become non profitable or non existent in some other instances.
Every individual who intends to have different forms of investment must be careful.It is not just about having different types of investment,but it is about making sure risk is minimized and individual goals can be achieved.
There is no highly successful individual in the business world of today,who doesn’t have some form of diversified investment portfolios or a wide range of investments.lets examine the following people cutting across all classes in Nigeria and examine how diversification of investment portfolio affects them:
The female trader: this is largely a group of women who deal in trading all kinds of goods available for purchase. Many of them fall largely into the uneducated group or largely without basic formal education.
It therefore means many don’t have any form of investment besides their shops and the goods they have on offer. For those who don’t have more than a shop, when such acts of government like demolition of structures, relocation, fire incidents etc takes place, they will have to start all over again or resort to help to be able to pick up their lives.
Some others, though uneducated but wise will go on to open other shops where some other business venture will take place in different ways. By this wisdom, their risk becomes minimized and wont resort to help from people or government when disaster occurs at any one of their outlets. This is an elementary form of diversification since the users lack formal education, but good nonetheless.
The rich businessman: This refers to a man who is largely successful or has some degree of success. A large number of rich people have different forms of investment in their investment portfolio. Besides owning companies or factories,their investment in financial assets cutting across different sectors.
Some approach their stockbrokers or investment firms, give them huge sums of money and ask them to invest in different forms such as bonds,treasury bills, shares of different companies etc.
This act keeps the young business man covered even if one of the company invested in or company operated folds up or liquidates.Its the reason the rich keeps getting richer.
An ambitious salary earner: In Nigeria today, many utilize all their salary to take care of one expense or the other. Many don’t have an understanding between wants and needs even when their salaries are quite good. If you are a salary earner who has nothing in the investment portfolio or no other stream of income from other sources, it means you will resort to help when your company suddenly liquidates. The way is to go and minimize your risk is by diversifying your portfolio.
A civil servant: Many civil servants in Nigeria today who have diversified their investments have an advantage unlike their counterparts in the private sector. This is due to the inefficiency of checks in the government sector. Many civil servants have other businesses they run concurrently with their jobs. Although its largely low, but they should diversify their investments more to minimize risks. This is the way to go.
Diversification is necessary from the common parlance we all say that “do not put all your eggs in one basket”. The Nigerian economic indices now indicates harsh facts like more job losses, more tax increase like the hike in electricity tariff etc will come in time
This article will enable any one who falls in their category captured earlier, as well as others not mentioned or similar become highly successful.
By following the steps, such individuals might become insulated from the harsh realities we have in the present day Nigeria.
Lets delve a bit into corporate structures, and give an example of the banks in the country as to how they diversify their investment portfolios.
The banks in the country have the conventional bank arm for deposits and withdrawals which we all know. They have their insurance arm, the mortgage arm, merchant banking arm etc.
Look at these scenario; First bank, First registrars, First insurance etc. If a policy comes tomorrow from government for example that makes it impossible for the banking arm to function in the country, rather than folding up and selling their assets as well as retrench people, they will continue operating the other arms of the business and wont need to worry about the banking arm that is closed.
By this, they have ensured that their investment portfolios are diversified and their risk is minimized no matter what happens.
Its a little different for individual portfolio but still similar. The difference is individuals will select financial assets more from the capital market into their portfolio due to their limited capital resource. The reason people hold assets are the following:
(1) Value appreciation: By this we mean the value of the asset becomes increased over time in overall value
(2) Return on investment (ROI)
(3) Need for immediate income
(4) Tax advantage desire
(5) Risk minimization
(6) Safety of principal.
Regardless of which ever reason of the 6 reasons mentioned above that the individual selects, the fact is that diversification is the way to go.
Whether educated or illiterate, young or old, financial education is important and that is being provided using this medium.
Government policies keeps changing from time to time,and we all need to wake up to this fact. Of the 4 examples of classes of people mentioned earlier, it is the rich businessman who understands it the most.
More and more people should invest in financial assets in the capital market, and thereby diversify their investment portfolios.
If you invest in a state government bond or a federal government bond for example, you can go to sleep without worries as their is stability of your investment, as well as favourable interest. It can never fold up as long as the federal Republic of Nigeria continues to exist.
In conclusion, I want to encourage all readers who don’t have diversified investment portfolios to begin to take those steps as soon as possible. Government policies and the environment may come up with policies that may or may not favour us in the future whether we like it or not. That way, our risks are minimized while we maintain our basic standard way of life, and then go on to create wealth for ourselves. Diversify your investment portfolio quickly.