Mark-to-market
Revaluing every position at current prices to get today's NAV. The Quarterly Review's first step. Mandatory before any other analysis — old prices = lies.
When you think about your investments, it's important to understand the current value of what you own. This is where the concept of mark-to-market comes into play. Imagine you bought shares of a company listed on the Nigerian Exchange (NGX) a few years ago. The price of those shares today might be different from what you paid. Mark-to-market is the process of updating the value of your investments to reflect the current market prices. This ensures that you have an accurate picture of your portfolio's worth. For instance, if you own shares in a popular consumer goods company, the value of your investment will change daily based on the stock's performance.
To put it in a more relatable context, think about buying a bag of your favorite snack, say maize, at a market. If the price of maize changes over time, the value of the maize you bought earlier will also change. Mark-to-market is like updating the price tag on that bag of maize every day to reflect its current market price. This helps you understand how much your investment is worth today, not what you paid yesterday. In Nigeria, where the Central Bank of Nigeria (CBN) frequently adjusts the Monetary Policy Rate (MPR) — currently around 27.50% — the value of investments can fluctuate significantly, making it crucial to keep your portfolio updated.
In addition to stocks, consider other investments like Treasury bills (T-bills). If you invest in a 91-day T-bill and the interest rates change, the value of your investment will also change. Mark-to-market ensures that you see the real value of your T-bills in your portfolio. This is particularly important for investors who are keeping an eye on their returns and making decisions based on current values. For example, if the CBN increases the MPR, the value of your fixed-income investments might decrease, impacting your overall portfolio value.
Dividends from your investments are another aspect where mark-to-market is relevant. When a company pays dividends, the value of your shares typically drops by the amount of the dividend. Mark-to-market will adjust the share price to reflect this drop. Additionally, there's a 10% Withholding Tax (WHT) on dividends and a 10% Capital Gains Tax (CGT) on profits from selling investments. Knowing the current value of your investments helps you calculate these taxes accurately. For instance, if you sell shares at a profit, you need to know the current value to determine your capital gains and the applicable tax.
Why it matters: Understanding mark-to-market is crucial for Nigerian retail investors because it ensures that you have an accurate and up-to-date picture of your investment portfolio. This helps you make informed decisions, manage risks, and plan for the future. Whether you're investing in stocks, T-bills, or receiving dividends, knowing the current value of your investments is key to effective financial planning and achieving your investment goals.