The most common question investors have is, “I have spare change, what should I buy?”
The answer is always invest in an investment that matches your financial goals, risk profile and liquidity needs. It’s called Objective-Based Investing. No investment is better than the other.
Let’s look at a few scenarios and provide guidance on options to consider.
This article is not investment advice; the objective is to show you, as an investor, how to invest based on your unique circumstances.
1. If you believe Nigeria will boom tomorrow, buy Nigerian shares today. As the economy booms, you are buying into a bull market at a discount. You can purchase individual shares directly, but that’s more expensive than investing in collective investment schemes like mutual funds, ETFs, and Unit Trusts (equity-based funds), which offer instant diversification and professional management.
Nigerian Exchange Traded Funds (ETFs) are less liquid than Nigerian unit trusts. Make sure both the company and the investment you are buying are SEC-approved.
2. If you think Nigeria will not boom tomorrow,thenbuy Nigerian money market funds. These are less risky than equities and guarantee a fixed return. These money market instruments will include short-term fixed income in bank Fixed Deposits (FDs)and Commercial Papers (CP).
CPs pay slightly more interest than FDs but carry a higher issuer risk. If you are risk-averse, stick to Bank-issued instruments, as deposits are covered by Nigerian Deposit Insurance Corporation (NDIC) up to N5m. However, because they are safer, they will not pay as much as non-bank or online savings apps. Fixed income also struggles in a high-inflationary environment.
3. If you believe Nigeria will get worse tomorrow, buy Nigerian dollar bonds tomorrow, not today. Those bonds will pay higher coupons tomorrow because the issuer will have to offer higher rates to make them attractive to you. If you seek exposure to bonds today and believe the outlook tomorrow is dim, then youmay consider USD money market funds. Essentially, convert your naira to USD and earn in USD. Confirm with the issuer if you will be paid dividends in USD.
4. If you have your rentmoney for next year in cash today, place it in a bank money market fund or fixed deposit. Maximum N5m per bank. Lock it up. Don’t buy shares or take any risk with the principal. We want a return of the principal here, not just a return on principal
5. If you are retired and aged above 70, yourportfoliomust be heavy in FGN savings bonds and bank fixed deposits. N5m per bank. You can allocate 10% in high dividend-paying shares. Also, talk to big, strong, reliable insurance companies about their annuity rates. Sorry, you don’t have the risk profile to take risks with your capital. Moving to a lower-cost location is also an investment.
6. If you will not be an active partner,don’tinvest in an informal transport business, trading business or any activity that requires constant supervision. If you must invest, are there debt options? Equity participation is legal but be aware of liquidity. If you need cash, do a debt investment; if you have time to be active in the business, consider equity investment
7. If you don’t need liquidity but want to preserve the value of your naira capital, buy real estate in a state capital, near the coast or near the capital city. Two words, title and location, ensure you have both of these.
8. If someone dashed you N1m, and you can afford to lose it but want to double it, try Bitcoin. It’s down now and will pump again; you can make 50% or lose 100%. Currency trading is not investing; it’s gambling on a future outcome. You can apply a stop loss strategy, but know that losses can still occur.
9. If you don’t want any wahala, buy USD, put it in a US FDIC-insured CD, and rest. Enjoy your peaceful but low rates. Only the US? No. Any EU member state is also fine, as long as it’s sovereign.
10. Your business is not your retirement plan; the income from your business is your retirement plan. If you trade, remove 10% of your gains and invest them in a separate vehicle that is very differentfrom what you do. An RSA is perfect; it’s a tax-deferred savings account that allows you compound.
10. Your business is not your retirement plan; the income from your business is your retirement plan. If you trade, remove 10% of your gains and invest them in a separate vehicle that is very differentfrom what you do. An RSA is perfect; it’s a tax-deferred savings account that allows you compound.
If you import phones as a business, set aside 10% of your gross profit and invest it in something else, such as an RSA or a securitized investment, such as a unit trust. That something else is your insurance.
Remember, you invest to meet objectives and not to make a return.
Always speak with your investment professional before deciding.