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Business News of Monday, 18 July 2016

Source: Devtracoplus.com

Why it is important to diversify your investment portfolio - Part 1

Eugene Birikorang is currently the Sales and Marketing Manager of Devtraco Plus. He spearheads the activities of the entire sales and marketing team, which is the front end of the business.

Eugene’s role is to market the brand proposition of Devtraco Plus, sell products, and manage the client base. He and his team take full control of the customer experience with Devtraco Plus, from acquisition, to retention, to customer care.

Eugene sees a lot of potential in Devtraco Plus and the real estate industry in Ghana as a whole, in terms of quality investments. He is keen about the growth of this sector, and is interested in putting his skills and experience to the best use in order to achieve this. Here are a few insights he had to share on investment, and how diversifying your portfolio goes to give you an advantage in the world of vested interest.

In your own words, how would you define an investment?

An investment is an asset (item/good/service) that is acquired, not for immediate consumption necessarily, but with the hope that it will generate income or appreciate in value over time. When you put your money towards something and you expect to get a return from it in the future, that is an investment.

Many people consider investment to only be related to stocks or placing money in the bank, but in everyday life, what kind of things can you qualify as an investment?

“Investment” is a broad word, but traditionally it has been limited to high level financial activities, like buying stocks and shares. In the broader spectrum it moves from our daily life to the high level financial investment. Pretty much everything we do in our daily life is an investment.

If you spend your time reading about a topic today, you are actually putting in time to gain exposure about the world tomorrow. Even in relationships, you are making an investment. This is because you are putting in your time with hopes that it would yield a good rapport over time, which is why people feel jilted when the relationship blows up. If you bought a taxi for someone to do rounds with, you are expecting to receive some returns from it. If you bought a router for your internet research, you could see it as an investment, because you are investing your money to gain more knowledge about the world you live in.

Anytime you put your money towards something or spend your time doing something, there are two things happening: it is either you are investing or you are not. So far as you were hoping to receive something in the future, I will term it as an investment. Everything we do in life at some point, as an investment.

What is the difference between investment and trading? With investment, there is a future benefit hoped for, not an immediate benefit. If you are doing buying and selling, you would not call that an investment. If I buy tomatoes, I am trading, but if I pay someone to deliver good quality tomatoes in 4 months’ time, it is a form of an investment.

What is your impression of the investment scene in Ghana? The investment scene in Ghana is hugely underdeveloped and underutilized. We currently do a lot more basic/traditional investments with flickers of incursion into the world of modern investments. Corporate investments are usually better advanced than personal investments.

What factors should influence your decision to invest (or not) in something?

Typically it is the risk and return policy, and every investor must understand this. Every investment has an inherent risk, and a return that is associated with that risk. Based on what your expectations are, it will inform what kind of investment you make, and the area you decide to play in when you are investing. Financially, we say that if there is no risk, then there should be no return. This is unless it is an arbitral, which is not a good case for economics. There should always be a risk, and the risk must be priced, before you get a return.

You need to analyze your prospective asset. You can use the PESTLE analysis where you analyze your asset in a political, economic, social, technological, legal and environmental sense to understand what the risk is. Most people do it on the fly, however, without sitting down to write the details of what it might be. This is why you are advised to “invest close to home”, which means you should invest in something you know about. If you don’t know about it, you can research on it. You should not just hear of an investment opportunity and jump into it without fully understanding what the risks are.

Other factors include what your expectations are, the reality of those expectations, and the barriers to entry into such an investment i. e. licenses to acquire, skills to build, etc. as against simply walking in with your money.

What is one most important thing to remember about investment?

I would still go back to emphasize on the understanding that investment is a play on risk and return. Someone once said that risks come from not knowing what you are doing. If you do not understand what you are into, you are more likely to be at risk. We have heard statements like “the future is unknown” and “anything can happen”. It is enough to tell us that there is a risk involved in whatever you do. Every investment has a risk. It’s the risk that justifies the returns.

What is your take on investing in the same thing? (“All eggs in one basket” scenario)

It is acceptable, but it is not advisable. If you look at the practice of investment, putting your eggs in one basket means you run a huge risk. You are exposing all your money/time/resources to one particular risk so if things do not go well with that basket, you potentially lose everything. When you are a farmer with a basket full of seeds and many farmlands, you spread your seeds across the different farmlands so that whatever the environmental changes or soil quality differences, some of the seeds sprout up. Putting all your eggs in one basket is like having 40 farmlands and pouring all your seeds on one.

It is a risk appetite. However I am a person of focus, so I might hold a different thought to that. I believe that whatever you place your focus on is what gets better. For example, if you invest in real estate alone, someone might call it “all eggs in one basket” but actually in real estate there are various appetites: low income, construction, high end, commercial buildings, etc. So even in real estate alone, you can still spread your eggs in that same industry. But it still opens you up to the risk of what could happen to real estate as a whole.

Generally, it is not a good idea to put all your eggs in one basket. Nobody does that in real life: most of us will hold about 2 or 3 bank accounts and still hold some cash on us. It is intuitive. That same skill applies when you are investing. It all comes back to the underlying factor of risk.

What are the advantages and risks of putting all your eggs in one basket?

If it goes well, you stand the potential of getting returns from every bit of your money/investment. If I have GHC 100,000 and I use all of it to buy cars that run the Accra-Kumasi route, the potential advantage is that if that business decides to boom, there is no single Ghana cedi of my money that will not generate returns. However if a friend of mine with that same amount of money decides to put half of it in the Accra-Kumasi transport business and the other half in lotteries, and the former does well while the latter does not, he only gains 50% returns on his total GHC 100,000 investment. This goes back to the point of knowing what you are doing. If you are really sure of it, you can be speculative enough to put all your eggs in that basket. But if it goes wrong you potentially lose all your money.

In the second part of this interview, Eugene dives more into diversified investment portfolios, and why Devtraco Plus stands as a good investment choice. Read to find out more!