Hello there! This week on the blog I am talking about investment portfolios. If you are a follower of this blog and our discussions here you must have read my articles where I break down investments and how important they are to growing wealth and preparing for the future (you can catch-up here and here for some of my past insights on investments).
This week we are looking at what your investment portfolio should contain. The first thing to keep in mind is that it’s important to diversify your investments – think of your portfolio as a field containing different types of seeds as opposed to just one. Some seeds will bear fruit faster than others, some will take a bit more time, and some may not even grow at all so you need to weed them out early enough. It’s the same principle with investments – they won’t all yield the same type of returns or at the same pace. Usually the higher the returns the greater the risks and the lower the returns the less the risks. Similarly, long-term investments typically have lower risks than short-term ones.
Our investment portfolios will be as diverse as our personalities, goals and risk tolerance levels, so there really isn’t a one-size-fits-all approach. Buy typically the most effective investment portfolio for building wealth and securing retirement is a diversified portfolio that has the right mix of long and short term investments as well as a mixture of risk profiles.
Whatever mix you choose you, you need to be clear on what your goals are. Which investments will sort out your short to medium-term needs and which ones are better suited to your long-term needs? Let’s explore a few:
Here are some of the must-haves for your investment portfolio:
- Domestic Shares: With shares, you can achieve two objectives – buy to keep or buy to trade. If you’re buying to keep then you should be looking for a company with strong financials and record of dividend payouts since that’s the return you’ll be getting. If you’re buying to trade, you should be looking for shares are frequently traded so you’ll be able to get a buyer fairly quickly when the share price moves in your favor. The goal here is to buy-low-sell-high.
- Equity shareholding: Here you’re not buying just for dividends but to own a reasonable portion of a company that has the potential to bring significant returns if the company is sold at a premium. There are many of such investments going right now especially in the Technology and Entertainment sectors, but regardless of the sector, don’t ever invest in a sector you don’t understand otherwise you won’t be able to tell if things that go wrong and you need to exit. Or conversely, be able to identify a good time to sell. If you’re looking for a viable start-up business to invest in (because the entry point for these will be quite low), a good place to look will be credible accelerator programs where you can listen to pitches from different companies, look at the numbers and see which you’d like to invest in.
- International shares: These may be a bit more complex to access when purchasing directly as you will have to engage an offshore broker and understand the relevant tax implications; however, there are a few platforms that let you purchase shares in offshore exchanges at a relatively low entry price.
- Bonds: These are used by companies or governments to finance large ticket projects. They could either be in local or foreign currency and are typically issued through banks. Because it’s a form of loan from you the investor to the borrower, you must be comfortable with the entity you’re investing in. The tenor is on average 3 years and above and at maturity, you receive the principal, the interest is typically paid annually or semi-annually depending on the structure of the bond,
- Mutual funds: A mutual fund is a professionally managed investment fund that pools money from many investors to purchase shares. The key selling point of mutual funds over direct investing is that because it’s a pool, it’s unlikely that all the shares in the pool will go bad at the same time, thereby giving you the investor some comfort. Another upside is that you can choose the type of fund you want to invest in. There are funds targeted at various areas which may of interest to you e.g. ethical products, gender-based funds, technology-based funds, etc. the downside is that the rate of return may not be as high as if you invested directly in a specific company.
- Fixed Income products – These are products that give you a pre-determined fixed return such as fixed deposits. Fairly low risk, the only downside is that for you to access the best rates, you’ll be better off not touching your money for periods of 30 to 365 days.
- Real estate: As we discussed last week, real estate investments are long term and the returns are not immediate but are a welcome addition to any healthy investment portfolio. Check out the article here.
- Commodity Trading – Commodities are another way to diversify a portfolio beyond traditional securities – either for the long or short-term, but bear in mind that commodities traditionally move in the opposite direction to stocks. There are commodities traded on the commodities exchange such as metals (gold, silver, etc.), energy (crude oil, etc.), agriculture (cocoa, sugar, coffee, etc.) and livestock. This requires some special training so I would definitely recommend you get professional advice before going into this area.
- Crowd-funding – This is a fairly new investment option where you fund a business entity with a number of other people who may/may not know one another with the expectation of pre-specified returns. If you decide to go this route, make sure that the option you’re investing in insures your principal, so even if you don’t make any profit, you at least get your money back.
You need not have all the above in your investment portfolio at the same time and you can add/remove as your needs evolve. The key, however, is to be intentional about growing your investments, getting professional advice (don’t depend on google) be clear on your goals and ask lots of questions. Don’t ever invest in anything you don’t understand.