Investing is one of the most effective ways to build wealth in Nigeria (and everywhere else), but it comes with risks. Markets fluctuate, businesses face challenges, and economic conditions change, all of which can affect your capital and determine your returns. However, there’s one strategy that helps investors manage risk while maximising returns: diversification.
Diversification is an investment strategy that involves spreading your money across different assets, industries, and markets to reduce risk. The goal is simple: if one investment underperforms, others in your portfolio can help cover the losses or boost your overall returns.
But how exactly does diversification work, and how can you use it to build a strong, long-lasting portfolio in Nigeria? In this ultimate guide, we’ll break it all down and share practical steps to help you diversify wisely. Let’s begin!
How does diversification work in a nutshell?
Diversification works by ensuring that your investments aren’t dependent on a single asset, sector, or market condition. In other words, you break down your capital into smaller chunks and spread them across multiple financial instruments instead of one.
For example, if you invest only in Nigerian stocks and the stock market crashes, your entire portfolio suffers. However, if you spread your investments across stocks, high-interest savings accounts (HYSAs), real estate, bonds, and international assets, your losses in one area may be offset by gains in another.
And beyond protecting your capital from losses, diversification can also be an excellent way to make more money in the long run. By carefully spreading your investments, you could make more money, thanks to different return rates and payback periods.
Why is diversification important for your personal finances?
We briefly touched on the topic of diversification in our article on investing. In it, we mentioned that diversification is an integral part of investment education and its importance in building wealth. So, exactly how does it affect your finances?
Diversification offers several key benefits, including:
- Risk reduction: Investing in multiple assets reduces the impact of a single investment’s poor performance.
- More consistent returns: A well-diversified portfolio is less volatile and provides more reliable returns over time.
- Protection against market downturns: If one market sector declines, investments in other sectors can help cushion the blow.
- Long-term financial growth: Diversification ensures your portfolio remains balanced and grows steadily, even in uncertain times.
We have now covered definitions and benefits. Let’s get to the good stuff!
What are the types of diversification strategies?
A diversification strategy is a plan that helps you allocate your funds across different investment options in a way that aligns with your financial goals, risk tolerance, and time horizon. A strong strategy considers multiple factors to help create a portfolio that maximises returns while minimising risks.
Here are some of the top investment diversification strategies:
- Diversification across asset classes.
- Diversification within asset classes.
- Diversification across industries.
- Diversification based on corporate lifecycle stages.
- Diversification based on market capitalisation.
- Diversification based on risk profiles.
- Diversification based on maturity lengths.
- Diversification based on geography.
- Diversification based on instrument tangibility.
- Diversification across platforms.
You can use one or more of these strategies when diversifying your portfolio. However, the “right” one (or combination) to use depends on your experience and risk appetite. Let’s explore each strategy in detail so you understand how they all work.
1. Diversification across asset classes
This involves investing in different asset types (such as stocks, bonds, real estate, mutual funds, and commodities). Each asset class reacts differently to market conditions, so combining them helps balance risk.
2. Diversification within asset classes
Instead of investing in just one stock or one type of bond, you spread your investments within an asset class. For example, if you invest in stocks, you can diversify by buying shares from different companies rather than just one.
These companies can offer the same product or services, but targeted at different markets or demographics. For example, a beauty company that makes products for beard growth or maintenance versus one that offers cosmetic remedies for balding.
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3. Diversification across industries
Investing across different industries (like banking, technology, agriculture, and healthcare) protects your portfolio from sector-specific downturns.
4. Diversification based on corporate lifecycle stages
This means investing in companies at different growth stages. Think startups, mid-stage businesses, and established corporations. Startups may offer high returns but come with higher risk, while mature companies provide stability.
5. Diversification based on market capitalisation
Market capitalisation refers to the size of a company. A mix of small-cap, mid-cap, and large-cap stocks ensures a balance between growth potential and stability.
6. Diversification based on risk profiles
Investors have different risk appetites. Some prefer low-risk investments (like government bonds), while others go for high-risk options (like cryptocurrencies). Balancing these ensures stability and growth.
7. Diversification based on maturity lengths
This strategy involves holding investments with different time horizons — short-term (like treasury bills), medium-term (fixed deposits), and long-term (like real estate).
Safelock on Piggyvest allows you to vary maturity lengths and can be an excellent way to diversify your portfolio based on maturity — from as low as 10 days to as long as 1,000 days — while earning up to 20% per annum.
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8. Diversification based on geography
Investing in both local and international markets reduces country-specific risks. For example, global investments (like Flex Dollar) can protect against inflation or currency depreciation in Nigeria.
9. Diversification based on instrument tangibility
This refers to investing in both tangible assets (like real estate and gold) and intangible assets (like stocks and bonds). Tangible assets provide physical security, while intangible assets offer liquidity.
10. Diversification across platforms
Using multiple investment platforms (like Piggyvest, stockbrokers, mutual funds, and other fintech apps) reduces reliance on a single provider and offers more flexibility.
How to diversify your investment portfolio in Nigeria
You’ll need a mix of multiple strategies if you want to build a diversified portfolio in Nigeria. Don’t worry: it’s pretty easy to get started.
Here are some practical tips for diversifying your investment portfolio in Nigeria:
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- Start with a solid foundation: Ensure you have an emergency fund and stable savings before investing. Our PiggyBank and Safelock features can help with this. Simply download the Piggyvest app and get up to 20% annual returns on your savings.
- Understand your risk tolerance: Determine how much risk you can handle before selecting investments. Risk management is the bedrock of a balanced portfolio — especially if you want to thrive in Nigeria.
- Choose a mix of asset classes: Invest in stocks, bonds, mutual funds, real estate, and other assets to spread risk. Different types of investments come with different returns and risks. Understand them before investing.
- Consider industry and sector diversification: Avoid putting all your money in one industry. Instead, spread them across sectors you understand and are sure will thrive.
- Explore local and international investments: Consider Nigerian investments alongside options like global stocks or cryptocurrency. For example, you can save using Flex Dollar on Piggyvest and receive 7% annual interest (paid monthly).
- Use investment platforms wisely: Piggyvest’s Investify feature offers pre-vetted diversified investment options tailored to Nigerian investors. You can explore these to make up to 35% annual returns even if you’re new to diversification (or investing).
- Monitor and rebalance your portfolio regularly: Review your investments and make adjustments as needed to maintain balance.
These steps are solid, but you can tweak them based on your needs and financial goals to ensure you correctly diversify your portfolio.
Are there downsides to diversification?
While diversification is essential, it’s not without drawbacks. Knowing these downsides can help you make the right investment decisions.
Here are some of the downsides to diversification:
- Over-diversification can affect your earnings: Spreading investments too thin can dilute returns.
- Large portfolios can be very complex to manage: Managing multiple assets requires time and effort.
- Diversifying may result in higher costs: More investments may mean higher transaction or management fees.
The key is to find a balance — diversify enough to reduce risk but not so much that you lose focus.
You can also talk to a financial advisor if you’re unsure of where to start. These professionals are money maestros and they can help you figure out the best way to make the most of your finances — especially your investments.
Asset allocation vs. diversification: What’s the difference?
Asset allocation is simply how you distribute your investments across different asset classes (for example, 50% in stocks, 30% bonds and 20% real estate). Diversification, on the other hand, is about spreading investments within and across asset classes to reduce risk.
Both strategies work together to create a well-balanced portfolio.
The bottom line
Diversification is a powerful investment strategy that helps manage risk and improve financial stability. Whether you’re a beginner or an experienced investor, building a diversified portfolio is essential for long-term success.
Fortunately, you can diversify your portfolio and begin your journey to financial freedom today with Investify, Safelock, and PiggyBank. Simply download the Piggyvest app to get started.
The articles on the PiggyVest Blog are developed by seasoned writers who use original sources like authoritative websites, news articles and academic journals to perform in-depth research. An experienced editor fact-checks every piece before it is published to ensure you are always reading accurate, up-to-date and balanced content.
