MONEY MATTERS: Eyeing Alternative Investments In Nigeria’s Capital Markets

Investors are paid or make money in proportion to the level of risk they take. As such, successful investment is essentially about how well risk is understood, anticipated, and managed.

Investor psychology, unsurprisingly, seeks high returns with a guarantee that capital invested will not be lost. This is not, however, 100 per cent possible, as there is an element of risk in any investment. In fact, it is the element of risk that drives returns in investment.

As a rule of thumb, investors are generally paid in accordance with the level of risk they take. The higher the risk, the greater return. The challenge of investment, therefore, becomes balancing risk with returns so that investors are not dazzled into taking unreasonable risks by the glitter of implausibly high returns.

The level of risk that any individual is prepared to take is known as their risk appetite. Any potential investor should decide whether they are prepared to risk losing money for a higher return or adopt a less risky strategy with a lower chance of losing money, by settling for lower or moderate returns.

According to Coronation Asset Management, once an investor has established their risk appetite, they should match their investments to this appetite.

To construct the right investment strategy, investors can research various instruments themselves and put together their own portfolios. While many investors have learned a great deal over the years by trial and error, a better option for first time active investors is to approach an asset manager, like Coronation Asset Management, for advice.

“Asset managers are able to help individual investors assemble a portfolio of investments that match their risk appetite. For active investors wanting to track the performance of their investments in real time, it makes sense to work with an asset manager able to regularly report on performance, advise and guide responses. Since this involves 24/7 hands-on, tracking, reporting and advice specific to individual investors’ portfolios, active investment support comes at a cost.

“Today, there are also online investment options supported by digital platforms allowing individual investors to buy, track and sell investment instruments and funds online. While the effectiveness of these platforms varies, most require some level of investment knowledge and experience. Despite the hype and all the advice and guidance they provide, these platforms are not for first time investors,” the asset management outfit said.

Capital Market Investment Types

Coronation said alternative investments, like cryptocurrencies, while appealing to younger generations, have limited performance track records, are harder to understand and research, and, currently, represent significantly high risk.

It pointed out that, while there are a lot of investment options, instruments, advisors and platforms out there for aspiring investors, getting it right, by understating and managing the risks involved in investments take a lot of time, attention and knowledge. It also takes experience.

This is where collective investment schemes, usually delivered through group or mutual funds managed by investment professionals, become important. Most first-time investors simply do not have the time or research capability to actively construct and manage bespoke portfolios – or pay a bespoke wealth manager to do this for them. Instead, the best way to start on the investment journey is with mutual funds.

“Mutual funds are investment instruments that allow investors to place money in investment structures representing a collection of companies whose profile and performance matches their own risk appetite,” it stressed.

Commercial papers are unsecured short term debt instruments issued by corporations. While we have preponderance of CPs in the market, doing the due diligence to investing in high rated instruments and issuers is also important. On the other hand, treasury bills are short term debt instrument issued by the federal government, with tenors varying between 92, 181 and 365 days.

Bonds (FGN, State and Corporate) are long dated instruments issued by either the federal government, state government or corporations. Because they are longer dated, they offer competitive than that applicable on short dated instruments.

Investment Bubbles

Investment trajectories are also important when considering investments. While Coronation Asset Management advises investors to remain in their investments for a minimum of six months or a year depending on the composition of their portfolio, the longer the better remains an excellent investment philosophy.

That said, investors have different trajectories. Investors looking for a quick, though high-risk, return over six months or a year, should consider a portfolio weighted towards a conservative portfolio. Those with a two-year to five-year horizon would do well with a moderate portfolio. Those with a higher than five-years investment trajectory can also comfortably reduce risk with a growth portfolio.