Investment diversification: Smart means to diversify your assets

investment diversification

Diversification can be considered as a major important aspect of personal finance and investment. Even though it has received some criticisms from a few noted investors and financial analysts, the positive outcomes of it is still emphasised globally. This has therefore drawn the interest of many personal finance writers and bloggers to include diversification in their topics list. Diversification has similarly been mentioned in a number of write-ups on sikasem.org. In the post about Treasury bill vs. mutual fund, the importance of diversification and how mutual funds offer diversification opportunity was highlighted. The significance of diversification has also been covered in the following posts:

4 DUMB financial decisions I had made in the past

What is the ‘best’ investment product in Ghana?

Wealth tracking: Manage your wealth with Spf wealthTrack

Diversification approach

With the availability of abundant information and varying perceptions, following an effective and practical diversification approach can be challenging. Nevertheless, all diversification methods intend to reduce investment risks and volatilities by investing in a variety of assets classes or categories. At least, reducing investment risk, to some extent, can give you some peace of mind

Determining your assets mix

The main concept behind assets mix is that the growth of different assets categories can progress independently in different directions. For example, the growth of stocks is usually based on the prospects of companies. On the other hand, Treasury bills and bonds are mostly affected by prevailing interest rates. In a way, you hold different kinds of assets whose values neither grow nor fall at the same time. Thus, when stocks perform poorly, one may be cushioned by Treasury bills or bonds. The list of assets categories can be many. The common ones are stocks, mutual funds (equity, balanced, money market), Treasury bills, fixed deposits, bonds, savings accounts, cash, commodities, real estates (properties) and businesses.

 What is a good mix?

Arguably, there is no ideal formula when it comes to assets mix in diversification. How one chooses and mixes his assets ultimately depends on factors such as his financial goal, financial situation, age and level of risk he can cope with. Your financial goal could be building long-term wealth or an alternate retirement fund. With such a goal, your assets mix would be inclined towards long-term assets such as stocks and equity [mutual] funds. In other words, you would require an asset mix made up of a high percentage of long-term investment products.  On the other hand, if your goal is to create a source of regular income for the immediate to medium term, you may find it useful to have a mix comprising greater percentage of fixed income products. While focusing on your financial goals, you also consider how much risk you’re prepared to take to achieve those goals. For instance, if you’re the type who easily panics after losing some investments, then you may not be in the right position to allocate greater portion of your assets to risky investment products.

It is also noteworthy to consider mixing assets within the same category. That is, you don’t only diversify across different assets categories but also within the same category. In doing so, you diversify within stocks category by investing in different stocks on the market. This must also cover different industrial sectors such as banking stocks, manufacturing stocks and insurance stocks. Considering foreign stocks, beyond just the Ghana Stock Exchange could even be more helpful. This is because different markets don’t normally grow in the same direction. When Ghana Stock Exchange performs poorly, Johannesburg stock market may be performing better. The easiest way to invest in foreign stocks is to purchase equity funds that invest beyond the GSE. A typical example is Databank Epack fund as well as SEM All-Africa fund.

In addition, you diversify within fixed income securities by purchasing T-bills, bonds and probably fixed deposits. Similarly, you diversify within mutual funds by investing in equity funds, balanced funds and money market funds. You may even consider other alternative investments such as gold and antiques if you have the means.

Rebalancing your assets mix

As your assets keep growing, the original mix may become distorted due to the different growth rates of the different assets categories. Furthermore, your investment goal may change at any point in time. Thus, it would be necessary to regularly monitor and rebalance your assets mix. Stay abreast with current market updates and make use of the information to help rebalance your assets. The use of Spf wealthTrack can also guide you to know which assets categories require adjustments.



Avoiding over diversification

As earlier stated, a few seasoned investors have had their criticisms on diversification. For example, Warren Buffett, an American business magnate and investor, made a remark concerning people’s obsession about investment diversification. He argued:

Wide diversification is only required when investors do not understand what they are doing.”

Deducing from the above statement, Warren Buffett does not entirely consider diversification as a bad practice. Rather, his concern centres on over diversification and the notion that diversification is the ‘Messiah’ of investment growth. Yes, too much of everything can be bad too. In fact, over diversification can even hold you back from potential earnings. For instance, anyone who might be precisely utilising the GSE Composite Index (used to track all stocks on the exchange) for his diversification approach may not be making more returns as the one who rather focus on a few profitable stocks on the market. This is because even though the stock market records negative returns in some financial years, a few individual stocks make huge gains in the same financial years.

It may similarly be needless to invest in numerous mutual funds in the name of diversification. Don’t forget that the investment strategies of most collective investment schemes in Ghana follow similar patterns. At least, a look at our previous post on foundational stocks can give you a clue. Selecting a few good schemes based on past fund performance and reputation of fund managers can be a good way to go. Essentially, get to know your mutual funds so as to have a vivid picture of what they invest in. In that way, you avoid stashing your money in repeated portfolios.

To conclude, diversification of investment can be very useful in reducing one’s exposure to market volatilities and other investment risks. However, it must not be like spreading your tentacles everywhere with no focus. The main point is to focus on a few and manageable number of assets in different categories while considering your financial goals.

GSE records 16.31% return in first half of the year

Transol

After failing to post positive results in the last two years, the Ghana Stock Exchange continue on its track of recovering from previous losses. This is reflected in its performance in the first half of the 2017 year. At the end of trading session yesterday (30th June 2017), the GSE Composite Index inched up by 12.77 points to close at 1,964.55, representing a year-to-date gain of 16.31%. Likewise, the GSE Financial Stocks Index edged up by 11.5 points to close at 1,824.88, representing a year-to-date gain of 18.08%. Yesterday’s gains were made possible by six gainers and no losers. At the end of the trading session, Standard Chartered Bank Limited (SCB) led the gainers with 11 pesewas to close at GH¢17.04 per share. This was followed by Benso Oil Palm Plantation Limited (BOPP) and Ghana Oil Company Limited (GOIL), which gained 8 pesewas and 5 pesewas each to close at GH¢4.40 and GH¢1.87 per share respectively. Fan Milk Limited (FML) also gained 4 pesewas to close at GH¢11.82 per share while Enterprise Group Limited (EGL) and Ecobank Transnational Incorporated (ETI) both gained a pesewa each to close at GH¢2.39 and GH¢0.13 per share respectively.

In relation to the year-to-date performance of individual stocks, UTB bank lead with 133.33%, followed by BOPP (111.54%) and GOIL (70%) respectively. These are then followed by GCB (46.07%), SCB (39.98%), ETI (30%) and SOGEGH (20.97%). Others include CAL bank (16%), ALW (14.29%), SCB PREF (13.33%), TOTAL (12.12%), FML (6.1%), EGH (6.06%) and UNIL (5.76%).

Despite the overall positive results of the exchange, a few listed stocks posted negative returns in the half year. Notable of these stocks are Mechanical Lloyd Company Limited (-33.33%), HFC Bank (-26.67%) and Tullow Oil Plc (-22.10%). Other stocks with losses so far include Starwin Products Limited (-33.3%), Produce Buying Company Limited (33.3%), Ayrton Drugs Manufacturing Co. Ltd. (16.67%), PZ Cussons Ghana Limited (-9.09%), Guinness Ghana Breweries Limited (8.59%) SIC Insurance Company Limited (-8.33%), AngloGold Ashanti Depository shares (-7.69%) and Access Bank Ghana (-7.32%).

In the same period, a few stocks such as Agricultural Development Bank, Golden Web Limited, Cocoa Processing Company Ltd. and Clydestone (Ghana) Ltd. neither recorded a gain nor a loss.



Profits of SAS fortune fund drop in 2015

SAS fortune fund

The bearish economic outlook for 2015 had significant impact on performances of various sectors of the economy for the year.

Figures released by the managers of the fund showed that the fund decreased by GH¢ 0.0036 to close the year at GH¢ 0.5064.

The fund also made a total return of negative 0.71 percent as compared to the GSE Composite Index of negative 11.77 percent.

Despite these performances, managers of the fund maintain that the Strategic African Securities Fortune Fund has been able to maintain a lead role over its benchmark Ghana Stock Exchange Composite Index.

Speaking at the fund’s 11th Annual General Meeting Chairman of the SAS fortune fund Board, Maxwell Logan stated,

“The total net asset value of the SAS fortune fund at the end of 2015 stood at GH¢ 2,971,909 and representing about 5% decrease over the previous year’s total net asset of GH¢3, 129, 788.”

According to Maxwell Logan, the fund was also Continue reading “Profits of SAS fortune fund drop in 2015”

Ghanaians advised to buy stocks now

stocks

Investment bankers are urging Ghanaians to take advantage of the lower share prices on the Ghana Stock Exchange (GSE) to buy stocks of listed companies for future gains. With only a handful of listed companies doing well on the bourse this year, stock prices have been plummeting since the beginning of the year with many investors shying away from the equities market.

The GSE Composite Index (GSE-CI) stood at 1,787.50 points as at June 30, down from 2,352.23 points at the same time in 2015 with total market capitalisation dropping from Ȼ64.62 billion to Ȼ54.79 billion over the 12-month period. As at close of trading on Friday, the Composite Index from January has declined by 10.41percent while the GSE- Financial Index, which tracks the performance of only financial stocks, has also dropped by 13.28 percent with the market capitalisation dropping slightly again to Ȼ54.72 billion.

Chief Executive Officer of Databank, Kojo Addae-Mensah, strongly urged Ghanaians to seize this moment to buy stocks and reap the benefits later. “I will strongly advise that this is the time to go and purchase stocks and you will be smiling in five years’ time,” he told. Conceding that equity market has been poor this year and “worse than expected”, he is hoping that it doesn’t get any worse and the year will end at a small negative and after the elections investors will come back. Bemoaning the “short-term thinking of Ghanaians”, Mr. Addae-Mensah hopes that Ghanaians will see the basic investment principle of buying stocks at low prices and selling them at high prices.




Seth Aryitey, Executive Director of CDH Asset Management Limited also reiterated the call on investors and the Ghanaian populace to seize the opportunity to buy stocks. “We know the economy is down but this is the time to see opportunities and take advantage. If you look at the stock market, the share prices are rock bottom but there are hidden intrinsic values in there. So this is the time to start picking up stocks,” he said.

Mr. Aryitey noted that most people do not know enough about the stock market and so do not research properly to understand the fundamentals before buying shares. “Most people do not understand the stock market. The higher the risk, the greater the gain and if you understand that properly you will realise that when prices are down, that is the time to buy,” he added. Speaking on how to get people to invest and buy more shares, Mr. Aryitey said there is the need for stock market education and to give adequate information where necessary.

Managing Director of Ecobank Investments, Kesseih Antonio, told the B&FT in an interview that stocks have not been great for the past two years and that is because of the challenges the economy has seen including a power crisis that almost crippled the manufacturing sector.

 

Source: http://www.myjoyonline.com/