How to craft your investment strategy

If you have N10 million today, how would you invest it? This common question has an honest answer: it depends—not on the asset with the highest return, but on your personal financial objective. No investment is bad by itself. Stocks, bonds, real estate, or cash each serves a purpose. The key is to align them with your objectives, risk tolerance, and liquidity needs.

Before diving into the specifics, it is important to understand and answer four foundational questions that will set the stage for your entire investing strategy.

1. What Are Your Investment Objectives? 

Decide if you want capital preservation (protecting your principal for safety and lower returns) or capital appreciation (taking more risk for growth). Those focused on capital preservation, usually near retirement, often choose fixed-income assets such as Treasury Bills, Bonds, or money market funds, though this exposes their portfolio to inflation, which reduces real returns. For capital appreciation, investors turn to equities, REITs, or growth mutual funds, accepting greater volatility to achieve higher investment gains.

It is very important to align the allocation of your capital with your investment objectives. If your objective is capital preservation, then be overweight 70-90% with allocation to investments paying fixed income. If your objective is capital appreciation, then allocate 60-80% to equities for growth. Set SMART goals and review them at least quarterly or, as circumstances change, annually. Remember: younger investors benefit from compounding; older ones protect capital. Diversify across assets, sectors, and currencies to manage risk.

2. What Is Your Risk Profile?

Assess your risk profile and tolerance for short-term losses. Conservative investors prefer stable options such as T-bills or fixed deposits with lower volatility, while aggressive investors seek higher returns from stocks or alternative investments, such as crypto. Most balance both. Your risk profile depends on your comfort level with unrealized losses. Younger people with stable jobs can afford to take more risks, while retirees may not have that luxury. Advisors’ investment questionnaires can help. Do not invest simply because the investment promises a higher return; match your risk tolerance to the asset you seek to own.

3. What Are Your Liquidity Needs? 

Your investment time horizon matters. If you need funds soon (within 1-2 years)? Stay safe and liquid with money market funds, short-term T-bills, or savings. For 3-7 years, blend bonds with some equities. For 7+ years, you can hold aggressive assets, as time tends to reduce volatility risk. Irrespective of your investment time horizon, always keep a separate emergency fund (3-6 months of necessary expenses) in cash or near cash. Life events like weddings, school fees, or health issues can suddenly change your investment horizon.

4. Your Values and Beliefs

In addition to financial considerations, remember that your ethical values and beliefs also shape investment decisions. For example, Muslims seeking halal investments can avoid riba and forbidden sectors by choosing Sukuk bonds, screened equities in ethical mutual funds, and real estate. Nigeria now offers more options for ESG investing. While it may narrow your investment choices, ethical investing supports your values and helps you stay committed.

From Planning to Implementation

Once you answer the four questions, implementation must follow this path, as listed. We will do a deeper dive into all these in the coming articles.

1.     Agree on an investment plan, why are you investing, for how long, etc.

2.     Ensure you get life insurance to protect your dependents.

3.     Build an emergency fund and clear high-interest debt first.

4.     Participate in your company retirement plan or start a personal pension contribution.

5.     Start investing by matching your objectives to your asset allocation: direct stocks, mutual funds, ETFs, or government securities through banks or brokers.

6.     Use dollar/Naira cost averaging – invest fixed amounts regularly.

7.     Monitor quarterly and rebalance annually.

8.     Educate yourself continuously and seek professional advice when needed.

Remember, Discipline beats trying to time the market. Markets go up and down – your strategy should survive both.

Case Study

To demonstrate these principles, consider a 25-year-old seeking capital appreciation over 20-30+ years with higher risk tolerance and a growth goal.

A sample allocation for, say, N10 million:

·       70-80% Equities: International and Nigerian Blue-chip and growth stocks on NGX

·       10-15% Fixed Income: Medium-term bonds or money market for buffers.

·       5-10% Alternatives/Cash: REITs, commodities, or emergency cash. Adjust for ethical compliance if needed.

High equity exposure maximizes long-term returns for younger investors, who can withstand volatility. Rebalance yearly. This is an aggressive portfolio due to its equity allocation.

Let us contrast that with a scenario focused on capital preservation: a 65-year-old with a shorter horizon, low risk tolerance, and a focus on income and safety. In this case, sample allocation for N10 million as well:

·       70-80% Fixed Income: Ladder FGN Bonds and T-bills (different maturities – 1 to 5 years) for steady income and flexibility.

·       10-20% Equities: Defensive dividend-paying stocks only, for some inflation protection.

·       5-10% Cash/Money Market: High liquidity for emergencies or opportunities.

Capital preservation is key, with no room for big losses. Laddering the fixed income provides annual maturity so you can reinvest at new rates, protecting the nest egg while generating income.

The difference between the two scenarios lies in how much is allocated to equities. If conservative, only 20% was allocated, but when the objective is appreciation of capital, the equity allocation goes up to 70%.

In closing, this article is educational and not intended as investment advice. An early start, working with an adviser, is extremely beneficial. Equities are risky and can lose value. Always seek advice before investing.