Portfolio Construction — Building a Balanced Angola Portfolio

Why This Matters

Buying individual bonds or stocks is only the beginning. How you combine assets into a portfolio — the proportions, the mix of risk levels, the currency exposure — determines your long-term returns far more than any single investment pick. Studies consistently show that asset allocation explains over 90% of portfolio return variation. Getting this right is the most impactful decision you will make.

Core Principles of Portfolio Construction

1. Diversification (Diversificação)

Do not put all your eggs in one basket — the oldest wisdom in investing and the most important. In Angola’s context, diversification means spreading across:

• Asset classes: Bonds + equities + deposits
• Currencies: Kwanza + USD-indexed instruments
• Maturities: Short-term + medium-term + long-term bonds
• Sectors: Banking + insurance + exchange (as available on BODIVA)

No single investment should represent more than 20-25% of your total portfolio. If BAI drops 30%, and BAI is 100% of your portfolio, you lose 30%. If BAI is 25% of your portfolio, you lose only 7.5%.

2. Risk-Return Alignment

Your portfolio’s risk profile must match your personal situation:

These are starting points, not rigid rules. Adjust based on your specific goals, income stability, and risk tolerance.

3. Currency Balance

Given Kwanza depreciation risk, a balanced Angola portfolio should include both currency exposures:

• 60-70% Kwanza-denominated: Higher nominal yields (20-22% bonds, BODIVA equities)
• 30-40% USD-indexed: Lower yields (7-9%) but currency protection

This mix provides strong Kwanza income while insuring against significant depreciation events.

Building Your Portfolio Step by Step

Step 1: Determine Your Investment Capital

Total investable assets after emergency fund (3-6 months expenses in a liquid account) and short-term spending needs.

Step 2: Set Your Asset Allocation

Based on your risk profile, age, income stability, and goals. The allocation table above provides starting frameworks.

Step 3: Select Specific Instruments

Within each asset class, choose specific securities:

• Bonds: Mix of maturities (2yr, 3yr, 5yr OTs) and currencies (Kwanza + USD-indexed)
• Equities: Spread across available BODIVA stocks (BAI, BFA, BCGA, ENSA, BODIVA)
• Deposits: Short-term liquid reserve at your broker’s bank

Step 4: Implement Gradually

Do not invest your entire capital on one day. Dollar-cost averaging (investimento periódico) — investing a fixed amount regularly — reduces the risk of buying at a market peak.

Step 5: Rebalance Periodically

If equities rise and bonds fall, your portfolio drifts from target weights. Rebalancing (reequilíbrio) — selling overweight assets and buying underweight ones — maintains your intended risk level. Review quarterly or semi-annually.

Worked Example: A Kz 20,000,000 Moderate Portfolio

Eduardo is 35, earning a stable salary, with a 3-month emergency fund already in place. He has Kz 20,000,000 to invest with a moderate risk profile.

Target Allocation:

Expected Annual Returns:

• Kwanza OTs: Kz 7M × 21% × (1-0.05 tax) = Kz 1,397,000
• USD-indexed OTs: Kz 3M × 8% × (1-0.05) = Kz 228,000
• Equities (dividends): Kz 6M × 10% × (1-0.10) = Kz 540,000
• Deposits: Kz 4M × 16% × (1-0.10) = Kz 576,000
• Total income: ~Kz 2,741,000 (13.7% income yield on portfolio)
• Plus potential equity capital gains: ~Kz 900,000 (15% estimated)
• Total estimated return: ~Kz 3,641,000 (~18.2% total)

Currency protection: If the Kwanza depreciates 10%, Eduardo’s USD-indexed bonds appreciate in Kwanza terms, partially offsetting losses on his Kwanza assets. His 15% USD allocation provides a meaningful buffer.

The Bond Ladder Strategy

For the bond allocation, consider building a “ladder” — bonds maturing in different years:

• Year 1: Kz 2,000,000 in 1-year OT
• Year 2: Kz 2,000,000 in 2-year OT
• Year 3: Kz 2,000,000 in 3-year OT
• Year 5: Kz 1,000,000 in 5-year OT

When the 1-year OT matures, reinvest in a new 5-year OT. This creates a rolling portfolio with regular liquidity events and exposure to different points on the yield curve.

Key Takeaways

• Asset allocation drives 90%+ of portfolio return variation — it matters more than stock picking
• Diversify across asset classes, currencies, maturities, and (when possible) sectors
• Match your risk profile to your allocation: more bonds for conservative, more equities for aggressive
• Include 30-40% USD-indexed assets for currency protection
• Implement gradually through dollar-cost averaging
• Rebalance quarterly or semi-annually to maintain target weights
• A bond ladder provides both income and regular liquidity

Common Mistakes

Home bias concentration — Putting 100% in BAI because you bank there and know the name. Familiarity is not the same as safety.

Ignoring rebalancing — After a strong equity run, your portfolio may be 45% equities instead of target 30%. The excess risk is uncompensated.

Over-diversifying with too little capital — With Kz 2,000,000, splitting across 10 instruments creates tiny positions with high commission costs relative to size. With small portfolios, 3-4 positions are sufficient.

What’s Next

Portfolio construction tells you how much to allocate. Fundamental analysis tells you which specific investments deserve your capital. The next lesson teaches you how to evaluate Angola’s companies and bonds from the ground up.

Next Lesson: Fundamental Analysis — Evaluating Angola’s Investments

Build and test portfolios with the Portfolio Builder. Review current bond yields and equity prices.