Diversifying the personal investment portfolio – The Zimbabwe Independent


Piggy Trading and Investment Tips: Batanai Matsika

IN his book, The Intelligent Investor, Benjamin Graham describes an aggressive investor as an enterprising securities buyer who desires and hopes to achieve better overall results than his defensive or passive companion.

According to Graham, it is important for the enterprising investor to start with a clear design of action plans that offer a reasonable chance of success, which may include the following:

Negotiating in the market
It means buying stocks when the market has gone up and selling them after a fall.

Short-term selectivity
This means buying shares of companies that are reporting or expected to report increased profits, or for which another favorable development is expected.

Long-term selectivity
The focus here will be on an excellent record of past growth, which is seen as likely to continue in the future. In some cases, the “investor” may also choose companies that have yet to show impressive results, but which are expected to establish strong profitability in the future.

According to Graham, stock trading is not a transaction, “which on careful analysis” offers security of capital and a satisfactory return. In his efforts to select the most promising stocks, the investor faces obstacles such as human fallibility and competition. He may be wrong in his estimate of the future when the current market price may already fully reflect what he anticipates. Overall, there is a possibility of outright mistakes. Graham then comes to the following conclusion: To have a reasonable chance of achieving results above expectations, the investor must follow policies that are (i) inherently sound and promising and (ii) are not popular on the market. Marlet.

Piggy believes the answer lies in building a sound investment policy and strategy over time. The stock market has various possibilities to perform better than expected. There is a huge list of titles out there, many of which can be identified as undervalued by logical and reasonably reliable standards. Here are some of Warren Buffet’s investment principles to build on:

l Invest in what you know;

l Before buying a share, list the criteria;

l Be aggressive in difficult times

l Don’t worry about day-to-day market movements; and

l Buy Buffett stock.

Looking at the Zimbabwean context, an interesting story when it comes to investing as a retail actor on the Zimbabwe Stock Exchange (ZSE) concerns the Roy Turner case study. He died earlier this year at the age of 86 and was a savvy investor in the local market who had a large portfolio in ZSE given that he is still on many lists of the companies’ top 20 shareholders. of the ZSE.

Some of its holdings are in Mashonaland Holdings, Masimba Holdings, Proplastics, Falgold and African Sun. Note that in September 2005, SCAIFLOW Investments (Turner’s company) became one of the main investment vehicles on the ZSE, distributing its interests over 24 listed companies on the 80 counters.

While Turner was very conservative, never married, and used the bicycle as a form of transportation, a lot of ideas can be gleaned from him regarding investing in the stock market. An important lesson that can be learned is how to diversify a personal investment portfolio.

Diversification is one of the most important aspects when it comes to minimizing risk in an investment portfolio. This is because a portfolio made up of different types of investments has lower risk than any individual investment within the portfolio. Diversification therefore helps to reduce the unpredictability and volatility of the markets for investors. By increasing the number of securities in a portfolio, one can achieve higher Sharpe ratios.

Studies and mathematical models have shown that maintaining a well-diversified portfolio of 25 to 30 stocks gives the most profitable level of risk reduction. Investing in more securities offers other diversification benefits, albeit at a lower rate. Here are some of the seven ways retail investors can diversify their investment portfolios:

Diversification between asset classes

Investors should always consider the makeup of their investments and seek to diversify into different asset classes such as real estate (REITs), stocks, bonds, cash, mutual funds and others. alternative investments. The asset mix can also be structured according to the needs and objectives of investors. For example, if a person is planning to retire soon or is in need of cash, short-term bonds and investments may be appropriate.

Diversification within each asset class
Investors should always be wary of overconcentration in a single stock or asset. It may not be advisable to have a single stock constituting more than 5% of your stock portfolio.
Sector diversification

The holdings in the portfolio are expected to vary by sector. A key question for retail investors is how many stocks to buy to reduce their portfolio risk. According to portfolio theory, after 10-12 stocks you will be heading towards optimal diversification. However, the 12 must be diversified across sectors or industries. For example, an investor can invest in various industries such as food producers, retail, telecommunications, forestry and paper, life insurance, technology, pharmaceuticals and packaging.

Diversify by market capitalization

Another way is to diversify holdings of stocks by investing in small, medium and large capitalization companies.

Diversify styles

Investing in different themes such as growth and value could also bring balance to a portfolio.

Diversify through management

The concept of Fund of Funds is based on the need to diversify by integrating different management strategies within a portfolio. Likewise, retail investors can also allocate certain funds to external managers. Examples include the managed portfolios which are provided by several online stock trading companies.

Geographic diversification

An economic downturn in Zimbabwe may not affect Kenya’s economy in the same way; therefore, having investments on the Nairobi Stock Exchange gives an investor a little cushion against losses due to a downturn in Zimbabwe. In the same vein, ETFs (Exchange Traded Funds) such as db x-trackers (USA, World and FTSE) allow investors to access foreign indices which in turn constitute an ideal avenue for diversification. . We welcome ZSE’s initiative to introduce low-cost ETFs into Zimbabwe’s capital markets.

Overall, it should be noted that most non-institutional investors have limited investment budgets and may find it difficult to create a sufficiently diversified portfolio. Low-cost ETFs provide a platform for investors to gain exposure to global indices, commodities, and track local indices. In conclusion, the composition of the investment or the asset allocation chosen should always be aligned with the timing of the investment, financial needs and ease in the face of volatility.

Matsika is Head of Research at Morgan & Co and Founder of piggybankadvisor.com. – [email protected]/ [email protected] or mobile: +263 78 358 4745


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