Investment mix

Many of us already have investments of different types, but do these investments meet our investment objectives and cashflow needs?

To get optimum returns on investment, we must pay attention to the products mixin our investment portfolio. Our investment funds are channeled into three avenues: savings for emergencies, investments for life’s events (e.g. weddings or children’s education) and wealth-creating investments. Therefore, every investment portfolio must ensure that these three purposes are adequately catered for.

The ideal investment mix includes liquid (that is, easily converted to cash) and not-so-liquid products. The ratio of liquid to illiquid products depends on purpose and tenure of investment. Savings for emergencies because of its short-term nature should be in cash and near-cash products like money market, mutual fund or crowd-funded products. A children’s education product has a longer term because it is usually targeted at tertiary education. The education product manager would invest the funds in a combination of money and stock market products.

When we invest for wealth creation and retirement, which are long-term, we could buy real estate, private equity, and insurance annuities.

Tenure of investment is critical to the choice of product, whilst the age of the investor influences tenure. Therefore, age is critical to portfolio allocation. A person who is already in retirement is now totally reliant on his investments as his main source of income. Such a person’s portfolio should have more products that can easily be converted to cash and fresh investments in real estate (for build to rent purposes) may not deliver sufficient return on investment in the investor’s lifetime. Meanwhile, a 30 year old who still has a regular salary from employment/ business could invest more on illiquid assets. Savings for wedding and emergencies would form the liquid part of the young lady’s portfolio.

Another factor to consider in portfolio allocation is the individual’s attitude to the risk profile attached to each class of assets. Money market and real estate are usually-low risk. Stock market and crowd-funded products have higher risk because they carry the potential that the investor can lose his principal in the short run; but if investments are made in properly managed companies with robust customer bases, the investments would appreciate in the medium to long term. Higher risks investments generally have higher returns than lower risks alternatives. Therefore, we should diversify our portfolios and allocate investments to different investment classes and balance out the risk-return tradeoff.

From the above, we learn two things, Firstly, there is no ideal portfolio allocation that fits everybody because the allocation is dependent on very subjective criteria. However, every individual has his own ideal portfolio based on his peculiar circumstances and we need to arrange our portfolio in line with this ideal so that we can earn optimum return on our investments. Secondly, portfolio allocation is dynamic. As personal or market conditions change, we need to adapt our investments accordingly.

Products to consider in the investment mix are money market products (T-bills, FGN savings bonds, government and corporate bonds, commercial papers and fixed deposits), stock market products (company equity shares and mutual funds), trust products (voluntary retirement savings accounts, education trusts, unit trusts, real estate trusts, investment trusts etc.), insurance annuities (life/term insurance, retirement plans, education plans, etc.), private equity (including crowd-funded projects) and real estate. Of course, we can also start businesses that we run ourselves; but those are not sources of passive income because they require our time and attention.

Whatever investment mix we choose should fit our peculiar circumstances and be adaptable to changes in our personal and macroeconomic circumstances.

Before making any investment, we must do our due diligence comprehensively. We should seek professional advice from bankers, stockbrokers or real estate professionals but also ensure we are personally convinced about any product before investing. When professionals get paid a commission from the products they sell to you, their advice may not be in your best interest. So, seek advice from two or more professionals, in addition, go online to investigate the product you want to invest in. Part of our investigation may also cover the ethics and integrity of the underlying investment/ manager of the product – do they conform to your own moral values?

If we carefully follow these guidelines, we should have the right product mix in our portfolios, develop multiple streams of income and position ourselves to earn optimal returns on our investments.

Happy investing.





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