A quick review of the market in the previous year spur up excitements and the tendency to become emotional this year is there. On the back of an impressive performance of the Nigerian Stock Market in the previous year, the stock market had already recorded about 12 per cent in the first month of the year. While it is believed that the market is in recovery stage, investors are becoming emotional about their investments in the stock market. Investors are however advised to be wary of emotional investment since general price rallies in the market do not imply absence of risks. The stock market follows a random work, making it imperative for investors to adopt a more practical and result oriented diversification strategy.
It is possible for the mistakes of the past to reoccur. Therefore investors need to be wary of the current rally in the market. While available statistics shows that many of the stocks listed on the Nigerian Stock Exchange are undervalued, the underlying principle of the stock market has not changed – it is a zero-sum-game. So, as you invest in the market this year, don’t be carried away by the general price rallies in the market. Investment can still go bad if the basic principles are not adhered to. In a recovering market, emphasis should be placed on “quality investment”; long term orientation- don’t buy a stock you will not like to hold for minimum of five years should bear market resurfaces; get sound investment advice -don’t be emotional about investment and reduce your risks by diversifying your investment portfolios. Combination of this will shield you from uncertainty that is associated with stock market investments during market recovery.
Diversification implies creating an investment portfolio that contains different types of investments within each of the major asset classes — stocks, bonds, and cash. A diversified portfolio might include stock in several different companies or a number of stock mutual funds, government and corporate bonds, and Treasury bills.
A diversified portfolio could also contain securities in the same asset class that are not affected by the same variables. For instance, conglomerates, food products, food product diversified, building materials, petroleum marketing, and industrial goods, banking are completely different businesses. Premised on the current economic situation, one or more of these industries might tend to perform better than the others. If you build a portfolio that includes securities from a number of sectors, chances are that one or more would always be doing better than average.
Studies have shown that when you diversify, you try to ensure that at any given time, the value of some of your holdings might be down, and some might be up, but overall you are doing fine. The trick is to find securities that do not have tendencies to increase or decrease in price at the same time.