It is Time for Portfolio Rebalancing


Saturday, December 04, 2021 / 09.15AM / OpED by Sola Oni /Header Image Credit: The Motley Fool 


The emergence of the Omicron variant of the killer Covid-19 is causing disquiet in the global landscape. Barely a few minutes after the news break of Omicron's three cases in Nigeria, Canada swiftly placed the country on the ban list while every country was undergoing minor panic on the arrival of Omicron. Investopedia has identified the government's hold on the free trade market, the flow of funds between countries,  speculation and expectation, and demand and supply as significant factors driving the market into 2022. The trend becomes reinforced by digital transformation, changes in consumer behaviour, digital offerings and climate change.


The Investment Decision

Analysts have identified financial institutions, air transport, telecommunication,  food beverages and construction as the fastest-growing sectors. Investment in the securities market is a risk and return trade-off game, and investors should understand their investment goal and risk tolerance. This is where investment advisers called securities dealers to become relevant. In Nigeria, keeping money in a savings account in expectation of three percent interest while inflation hovered at double-digit is negative returns. But there are quoted companies on the NGX that have generated above 12 percent yield, year-to-date in price appreciation alone. Some investors live comfortably on dividends annually, while others live on a combination of dividends and capital gains. It is all about the power of market information and sound investment advice on maximizing returns and minimizing risks.


Where to Place the Microscope

Investment in asset classes is an art and science. While some investors adopt a buy–and–hold strategy, others trade their securities frequently. There is a passive and active investment strategy. The goal of passive investing is to build wealth gradually by buying a stake to own it for a long time. This class of investors does not take advantage of short-term price fluctuation to profit from their investment. They believe that the market generates returns over time. This is known as relative returns. Passive investors maintain a well-diversified portfolio through index funds that track a target benchmark. But this class of investors faces what is called total market risk. This is when the entire market experiences losses. Passive investment managers cannot realign securities even when it becomes clear that some stocks will decline in prices. Passive strategy lacks flexibility.


On the other hand, an active investment strategy is about frequent buying and selling of securities to maximize profit at every opportunity. The goal is to outperform the benchmark such as the NGX All-Share Index or Standard & Poor's 500 Index. The strategy entails striving for superior returns by taking more significant risks, including paying substantial transaction fees. To maximize returns and minimize risks, portfolio managers follow the market trends, shifts in the economy and changes in the political space. The managers also do in-depth research and market forecasting to keep abreast of frequent changes in the operating environment.


Compared with passive investment strategy, active strategy is vulnerable to greater risk.  Due to trading frequency, the plan is too expensive as it involves payment to research analysts, portfolio managers, and other transaction fees. This passive investment strategy is said to outperform the active one. But a combination of both passive and active investment strategies is desirable. Regardless of the investment strategy, every investor should review their portfolio and rebalance it periodically.


The Balancing Trick

Portfolio rebalancing is a process of "divesting in underperforming assets and investing in the ones  that have potentials to grow." An average portfolio comprises equity and fixed income securities. The weight of equity relative to that of fixed income reflects the risk tolerance of an investor. A risk taker's portfolio shall have a higher equity weight than fixed income securities, whereas it is the other way round for a risk averter.


Working the Calender

The simplest form of portfolio rebalancing is Calendar rebalancing. It is about analyzing the investment holdings within the portfolio at a predetermined time and adjusting to the original allocation at the desired interval. Portfolio rebalancing has three components: Reviewing ideal asset allocation, determining the portfolio's current allocation, and purchasing and selling securities to rebalance the portfolio. As the year rolls to an end, investors should contact their investment advisers and portfolio managers to rebalance their portfolios. The time is now. There are many blue-chip companies whose shares prices on the NGX are below their relative intrinsic values. Portfolio rebalancing is the way to generate alpha returns, irrespective of the factors that will drive the global financial market in 2022. Talk to your stockbroker. Happy new year, 2022.


Oni, an integrated Communications Strategist, Chartered Stockbroker and Commodities Broker, is the Chief Executive Officer, Sofunix Investment and Communications

 Proshare Nigeria Pvt. Ltd.


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