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Principles of diversification

ENTERPRISE
By Eve Mosongo | March 17th 2021
African American woman holding dollars [Courtesy]

Any investor worth their salt will tell you that one of the worst mistakes you could ever make is pouring all your money into one investment. ‘Don’t put all your eggs in one basket’ is an adage popularly used and one that still rings true.

Why is this? You ask.

Well, two reasons actually.

First, so that you’re not severely affected by market swings. And second, so you are able to optimise your returns.

If your only investment was in popular stock, I believe you’d have wanted to keep other types of investments, such as treasury bonds, which would have ensured that you offset any stock market losses you incurred due to the pandemic. However, determining the right mix of investments is not easy.

That said, here are tips to consider as you search for the right investment options to include in your portfolio.

1.    Don’t sidestep research

Before buying, say, a car or a phone, you first research the brand, model and specs. Right? Approach investments with the same gusto since you’ll be sinking most of your life’s savings in them. Group Head of Treasury at Anvil Shield Group, Kennedy Osano, says, “Most Kenyans invest in land. For example, one might buy a piece of land in Malindi without even visiting the place. They do it via phone and then they’ll ask, still through phone, for pineapples to be planted on the land. Then they’ll wait to earn from it, something that may be akin to pulling teeth.” The failure is largely from not knowing the business of the investment they are getting into.

2.    Know your risk appetite

“Chances are that you’ll gain higher returns from high risk investments such as stocks. However, even though low risk investments may have lower returns, they aren’t as risky,” he adds. Figure out your risk tolerance and have set goals. Ask for advice. Don’t go with your gut - this isn’t gambling. Put in the work before you invest.

 3.    Don’t be a predictable investor

Get out of your comfort zone. You might be limiting your opportunities for higher returns by investing in the same thing over and over again. And, if you’re the kind of investor, the one who basks in comfort, you’re bound to miss new opportunities because you’re not adjusting to the changing times. Good examples? Export business and the airline industry came to a standstill due to the pandemic. Others who were forced to shut down, with some closing shop completely, include the hospitality industry and restaurant businesses. If you’d invested in any of these industries, now’s the time to rethink your portfolio… after thoroughly doing your research. What’s the worst that can happen, anyway? “Diversify your investments in the context that you do not have several investments in the same sector. If you are buying shares, do not buy shares of companies in the same industry,” Osano elaborates, adding that one should not just invest in shares.

“Try T Bills, fixed deposits, government bonds, unit trusts… so that if something happens to a particular segment, your money is safe.”

4.    Not all investment opportunities are obvious

The most common investment among Kenyans is land, and that is why some of the rates you hear are bloated.

Raymond‌ ‌Collins,‌ ‌CEO‌ ‌of‌ ‌Whiteside‌ ‌Capital‌ ‌Group‌, compares price movements in investments to auctions. He believes that demand and value are pushed higher when a significant number of investors start looking into alternative investments – the undervalued assets.  And they have mastered the art of driving prices up in undervalued assets using that principle. “Inviting multiple potential buyers always leads to competitive bidding that pushes the price of the item higher, enabling auctioneers to maximise their profit. We source and introduce opportunities for our clients to fund the acquisition of undervalued assets. In return, we allocate a share of the profits to our clients after every successful auction,” he shares. As an investor, it is up to you to study the market keenly and invest in undervalued assets or enlist the help of companies whose job is to advice their clients on the next hot thing before prices go up. Osano adds that buying and holding on to investments, or assets such as rare vintage vehicles and artefacts, with the goal of price and value appreciation, is another approach. “Such opportunities allow those who’ve invested to gain profits through acting fast and quick sales.”

5.    Take advantage of tech solutions

This goes hand in hand with getting out of your comfort zone. It needs one to stop thinking about just land investments or stocks in companies that have been around since Kenya gained independence. Investing has become easier and more transparent because of innovation. And, investing in tech solutions does not need you to have a college degree in Information Technology to leverage on its benefits in order to invest. There are numerous online platforms that can help you weed out bad investments. Use them to make sure that you don’t have investments that get affected by chain reactions whenever something untoward happens in the market.

 Some of the websites to read up about tech solutions include:

· Einvestingforbeginners.com

· Wealthsimple.com

· Wonderprofessor.com (BUS-123: Introduction to Investments)

6.    Be wary of capital erosion

As Warren Buffet said, the first rule of investment is don’t lose money. And the second rule of investment is don’t forget the first rule. And that’s all the rules there are. Do not invest heavily in areas which might lead to capital erosion. When investing, put majority of your investments in regulated industries.

“Never go for an investment which will take more than five years for you to get returns. And always take into account value erosion of money, inflation and fixed rates when investing,” says Osano.

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