Why You Must Diversify Your Investments

By Ola Emmanuel

Within a space of 30 days this year 2007, I have been opportune to give lectures on the unique qualities of joint investing to two bodies with similar investing goals and structures; the first purely made up of corporate executives while the second is a mix of businessmen and employees. The common denominator of the two meetings is a poser on the unique qualities of joint investing. In today’s piece, I will explore one of the ‘unique qualities’, though not limited to joint investing but highly important to any healthy investment. A case that is still very fresh in mind will be used to introduce my drift.
Few hours after some investors bought the shares of Cadbury Plc (last quarter 2006) the Nigerian stock market players were stunned with the news that Cadbury Plc has been involved in overstating its financials over a period of years. Within a space of hours, the hope associated with a ‘good-buy’ in expectation of capital appreciation of the stock was dashed. The share price embarked on a free fall. Quite frankly, not a few shareholders who put money on Cadbury Plc’s stock spent ruing their loss, hissing and downcast. How many investors spent the end of the year and New Year in hospital beds! In Oak Magazine analysis of ‘one-year performances of some selected stocks’ (to be released in the coming Edition 9), Cadbury Plc recorded overall market price loss of 50% in 2006. The last 12 months market performance analysis reveals that Cadbury stock recorded highest market price of N70 on August 18, 2006 while the lowest price of N27.90 was recorded on January 8, 2007.
To an investor who puts his money solely in Cadbury’s shares, last quarter 2006 is a disaster. But someone who has a basket of stocks (which Cadbury’s is part of), the performance of other stocks may reduce the effect of the bad fortune. To one, it is absolute risk bearing while to the other, it is a risk mitigated because such an investor diversifies his investments. One must be quick to point it out that investment diversification is a product of funds availability. A small, one-off investor may not have such an opportunity, but there is a way.

Risks Are Investors’ Unfriendly Companions:
As is common to all going concerns, investing is also a risky adventure. However, it is possible for one to exercise control over some risks while you can only guard against some. The economic downturn (general risk of investing) is occasioned when an economy goes bad. This you may not be able to exercise control over. Another is Inflation which destroys values and creates recessions; thus having overall negative influence on investments. Holders of non-performing stocks suffer more in this situation.
But a risk as experienced in Cadbury last quarter year 2006 is such that all investors should strive to exercise control over. This is achieved through diversification of investments. Simply put, ensure that you spread your investing fund over as many stocks or options as possible. To an institutional investor or big player in the market, this is easily achieved. But how can someone who manages to raise N5,000 diversify his investments? Then I ask: does that means small, occasional investors cannot spread their own money over several investments? This piece is not about investment risks, but why you must diversify. God willing, I will handle the issue of risks another day.

Is Investment Diversification An Exclusive Preserve of Big & Institutional Investors?
No! My philosophy is that no man is limited except he chooses to limit himself. Small money for investment do limit ability to diversify but there is always a way out. An unusual situation does need unusual ingenuity for one to overcome it. Gentle ladies and men (or whichever way you want it), it is a mater of intelligence and how willing you are to maximizing the yield (ROI) of the little money you have. Every investor, big or small, institutional or individual, can diversify. An investor who is small because of his individuality can become extremely big if he invests in a group or with a group. And it is based on this conviction that led to the establishment of Oak Magazine Investment Club (OMIC) so that individual small investors can be playing big and enjoying fully the benefits that are hitherto exclusive preserve of the big and institutional investors. For instance, a small investor who is a member of OMIC that invests N2,000 monthly is able to spread his little money over several investments; thus able to mitigate against risks. Can he spread such little amount of money if he wants to stand alone? He may even find it difficult to get a stockbroker to listen to him.
Henceforth, spread your investing risks. Make it a habit to spread your money when investing. If your money is small, join investment club. You may call in this respect.Till next week, enjoy my Pen, and stay financially fit.

Ola Emmanuel is the Publisher of Oak Magazine. A practitioner in the areas of Financial Fitness, Human/Business Development, Entrepreneurship and Academic Excellence. Contact: 08023257707; www.oakmagonline.com oakmagazine@yahoo.co.uk