By PETER EGWUATU

Investment diversification is a good strategy for investors who want to make steady returns in the financial markets.

In the financial markets, we have stocks/equity, bonds, real estate and international investment. Like as stated last week, diversification of investment comes with a lot of advantages and must not be ignored.

Stocks help both retail and non retail investors to grow their portfolios, while bonds bring in steady income. Real estate provides both a hedge against inflation and low correlation to stocks, in other words, it may rise when stocks fall.

International investments provide growth and help maintain buying power in an increasing globalized world.

On how investors can allocate their money for investment, there are several factors that needed to be considered. The first thing an investor needs to consider is age. The younger investors can take high risk than the older category of investors.  After the age consideration, the amount available for investment would follow. For people that have small amount of money, they can diversify their investment through investment in mutual funds.

Mutual funds are investment pools that combine the money of many individuals to buy stocks, bonds, real estate, international securities, and the like. In international markets, we have several index funds. To make things really simple, an investor can buy so-called “index” funds, which purchase all the shares of a particular index, such as the stock market’s Standard & Poor’s 500 Index of big company stocks. There are also bond index funds, international indexes.

In Nigeria, we have the real estate fund, money market funds, and stock market funds that investment managers do manage for investors.

To determine how much money needed to put into each investment category, first an investor can set aside cash that could be kept in banks in form of savings or fixed deposit.

The other money with an investor can then be put into income investments to handle emergencies and near-term goals.

For big and middle income earners, they can invest some percentage in stocks, bonds, real estate and international market.

But, the age factor must be considered. For older or age people, what they required is fixed income investment like bonds, treasury bills, fixed deposit with banks.

So for the age ones they can invest 80 per cent in bonds, 10 per cent in shares and 10 per cent in real estate trust fund.

Once a young investor, for example diversified its investment by putting its assets into different categories. It’s not enough to buy one stock, for instance, you need to have a lot of different types of stocks in that portion of your portfolio. That protects you from being ravaged when a single industry, say, financial services or health care begins to drop.

Though diversification protects investors from devastating losses, it also costs them in average annual returns. That is because risk and reward go hand-in-hand in the financial markets. So, anything that reduces ones risk k will also reduce its return.

But an investor can take a little risk, unless he is close enough to retirement that the additional security is particularly valuable. This is the reason why age is very important when determining investment choice.

 

Disclaimer

Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.