Portfolio management

PROFESSIONAL wealth managers use complex algorithms and regression analyses to determine the optimum way to manage their clients’ investment portfolios. The purpose for this is to ensure that each client’s investment objectives are met by investing in assets that match the client’s risk appetite, religious/ ethical beliefs, time horizon, and provide income to meet the client’s expenses. For most of us, even though we cannot afford to pay professional wealth managers, our portfolio management goals are identical to that of the professional managers. So how do we achieve similar results without the use of complex tools? By looking at each goal and identifying the route to actualising it.

Firstly though, we must take a medium to long-term view in portfolio management. Let us avoid fads and hot tips. Take a cue from Warren Buffet, the world’s most successful and richest investor. He always takes a long-term view. Except if something catastrophic happens, it is best to adopt this approach in managing individual investments. Incidentally, none of those aggressive investors, who dive in and out of investments, are in the Forbes’ Rich List. So then, whose investment strategy is more effective?

We must also bear in mind the principle of portfolio diversification, as it is a major cornerstone in portfolio management. We discussed this comprehensively in last week’s article.

Next, we must manage our portfolio to match our investment objectives. If we want to grow our wealth, especially when we are still young and working, then we can look at investments that allow you to automatically reinvest your income. These include mutual funds and fixed deposits. Young investors can also afford to take bigger investment risks as they have sufficient time to rebuild even after a big loss. if our objective is wealth preservation, this is common with the older investors, the portfolio should carry low risk assets like FGN Treasury Bills.

The risk appetite of each investor would also determine the kind of assets in their portfolio. Low risk clients should invest mainly in money market instruments. Though they provide lower return on investments, there is almost a 100% guarantee that the principal would be preserved.

Ethical beliefs also play a major role in portfolio management. A person with strong ethical beliefs may refuse to invest in tobacco and alcohol shares irrespective of promises or history of high dividend payouts. Some mutual funds in Nigeria actually have ethical funds that invest only in investments with high moral standards. Other investors have different beliefs like animal rights, global warming etc. which affect the assets they have in their portfolios.

Time horizon is another vital part of portfolio management. Money market investments deliver quick returns unlike real estate. In the long run, real estate would deliver higher returns but not everyone has the luxury of time. If for instance, you have some money that you would not need for six months, you should put such in the money market. If it is put in the stock market, it may not deliver any material income and may actually be a loss. Putting it into real estate is certainly out of the question as real estate investments are notoriously illiquid (difficult to convert to cash). Therefore, we must match investments to time horizon.

Another consideration in portfolio management is the liquidity (cash) needs of the investor. An older investor who has retired, needs money monthly for upkeep, medication and other lifestyle needs. Such a person’s portfolio should majorly consist of money market instruments that pay out revenue monthly. Old investments in real estate could be sold and the proceeds invested in FGN Treasury Bills, that periodically pay tax-free, upfront interest. No new commercial real estate investments should be made by investors above 70 years, except if they are part of an estate (last will and testament) management strategy. Younger investors who have a regular source of income can afford to invest a large proportion of their portfolio in illiquid real estate assets.

In addition to the above tips, we can still have access to professional-type tools with the use of personal financial management (PFM) apps and robo-advisors. The latter are PFM apps that use artificial intelligence and algorithms to deliver personalised financial management advice especially on portfolio management. There are a number of good free brands in the market and they are available in your cellphone’s app store. Conduct due diligence online to see the reviews and feedback from their users before choosing the most appropriate for you.

Happy investing.