You can't afford not to invest

If you are not investing you are giving away money, simple as that. If you have your money under your mattress, or in a save deposit box, this money is losing value. Why? As we all know, due to inflation. Most of the developed economies are pursuing monetary policies that try to achieve higher inflation rates, known as expansionary monetary policies.  Every single person that has an income should be investing a percentage of its money, period. If you have a salary and you are keeping all this money in your account without producing any return, you are not financial savvy, and what is worse, your bank is not doing you any favor by failing to educate you on the time value of money. So, if you don’t have anything invested… START NOW! You can thank me in when you see the power of compounding working miracles for you.

Investing is not a game, it is not science either. This is why statistics plays such an important role in investing (a topic that we will leave for a different post), and why no one should believe statements from financial advisers such as: “I assure you 10% annual return,” “This investment offers 5% annual return and is risk free,” and so on.

What I am trying to get across is that everyone that has an income should be investing, but that it is important to acquire a basic knowledge of the financial markets before doing so, even if you are going to go with a financial adviser, a private banker or any type of asset manager. Why? Because the most important person for each of us is ourselves, and if a money manager has to pick between the well being of himself and the one of the client, it will definitely pick himself. It gets worse if you are a medium or small investor, since your financial adviser will always fulfill the big client’s necessities before yours. So, to sum up we all need to have a basic understanding of the financial markets before starting to invest, this is the only way to shield our patrimony.

In this post I am going to provide the 10 most important points that you should have clear before you start investing.

1. Should you be investing?

I know that before I said “anyone with a salary should be investing,” but there are particular cases in which this might not be true, at least for some time. If you have debt at a high interest rate (almost all credit card debt will match this definition) you should pay it off entirely before even thinking about putting any money into the market. It is simple to understand why. If you owe money and the interests are, fore example, 10%, it doesn’t matter if you can invest in the markets and make an average return of 9%. You are still losing 1% in comparison with the situation in which you pay off all this debt. Now, if you have a mortgage with an interest payment of 3%, you should not pay off the whole mortgage before you start to invest. In this case you can make, using our previous example, 9% investing and only pay 3% interest for the mortgage. So you will make 6% more than if you just completely pay off the mortgage. The relationship is oversimplified in this explanation, for example that 9% return is not secured; it might vary depending on the market conditions, while the debt will still be due regardless. This is why a lot of radical risk-averse people would prefer to pay off the debt before investing, despite of proven fact that, in average, they are losing money. The second situation in which you should not invest, even if you have a salary, is that one in which you don’t have an emergency fund. Every rational person should keep some amount of money  in an account just to make sure that an adverse event does not challenge her financial situation and that she doesn’t need to pull money from her investments. However, if you are debt free, you have an emergency fund, and you have a salary… You better be investing!

  2. What are you investing for?
Are you investing to pay for your kid’s university, to buy a new car, to take that around the world vacation that you have always dreamt of, to enjoy a nice retirement, to have a passive income? As you can see, there are a limitless number of reasons to invest. You need to understand yours because depending on what you want to invest for; you are going to use different investment vehicles to achieve your goals. Let’s give a few examples to better understand it.
If you have a sizable amount of money and you want to leave of it, or just have it produce some income for you, you can buy dividend stocks and bonds that will assure you a stream of cash. If you get the right mix, you can enjoy a steady income over the years in order to use as you please.
If you meet the following criteria
You are in your 20s or in your 30s
You have an emergency fund
You have a salary
You are debt free
You don’t have the need to pull money out in the next decades
you should create a balanced portfolio with a high level of risk. Most likely it would include a high percentage of equities and a sizable exposure to emerging markets with a high growth potential.

3. There is no return without risk
No one, wait I’ll repeat: NO ONE is telling the truth if they say they can offer a return higher than the risk free with no risk. It is just not possible. In our post Risk in finance and the why of risk management  we gave a comprehensive explanation of what risk is and how to measure it, so take a look to refresh your mind.

4. You have an optimal risk target, find it!
In the investment world, you should not aim for a particular return; it is never the right strategy. The process should start by identifying your level of risk, and only then maximize the level of return for that particular level of risk. The real key variable is risk because at the end of the day, if you risk too much you might go bankrupt and you don’t want that! This is why we need to decide what level of risk is appropriate for us. How do we do it? We need to assess our risk profile. In most developed countries, registered financial advisers are required to assess the risk profile of their clients. These financial advisers will provide a questionnaire that will try to gauge the following characteristics of the investor:
Time horizon
Cash requirements
Attitude towards risk
Financial situation
At the end of the day what the financial advisers are trying to find out is what amount of money are you willing and able to lose within a particular level of probability. You should try to find this number before committing any money to the financial markets. It will be truly dangerous to invest in a vehicle in which you can lose more money than the amount you are comfortable with losing. As you can see, you not only have to understand your level of risk but also the different investment vehicles in order to know what is the risk of investing in them.

5. Diversification is key
In order to diversify you need to know about the different asset classes. We are currently building a database with as many possible investment vehicles that exist with their description and characteristics. For now, this are some of the most common investment vehicles, including alternative assets: stocks, bonds, derivatives, real estate, commodities, derivatives, hedge funds, venture capital, private equity…

6. Economies follow boom/burst cycles
Economies, as human emotions, rise and fall. Understanding how the economic cycle works, in which phase do we stand, and which type of companies and investment vehicles perform better in each particular phase of the cycle is completely crucial to perform in the investment world.

7. Always question your investment selection
Understand that if you are selling, someone is buying and that if you are buying, someone is selling. So, there is someone in the other side of the trade that is, on average, as smart as you. Try to find out why that person is taking the other side of the trade. In other words, take your strategy and try to see how it could go wrong and with what probability. This reflection might show you that your strategy is not as robust as you thought or it might give you even more reasons to invest, regardless; it is a necessary and sometimes forgotten step.

8. What is the cost of investing?
Now that we know our risk level and that we should diversify we need to focus in which investment vehicles we are going to use to create our portfolio. We cannot stress sufficiently how important the cost of an investment is for its final return, and how many times these costs are completely neglected by the investor. The costs come from different sources: brokers, financial advisers, investment vehicle, and others. You can understand how to minimize these costs and control them, and only then, it will make sense to invest.

You should always do the appropriate due diligence, find out how the fees of the different brokers, financial advisers and investment vehicles relate. This is substantial to realize the highest potential returns. The final, but not least important, type of cost that we should care about is the cost associated with taxes. Understanding the tax treatment of the different type of investment vehicles and their returns is key for investors.

9. There will be ups and downs
The markets are not gentle, be prepared. You might see green from the moment you start your portfolio, but most likely it will be a bumpy ride. The best strategy is not to continuously check how your investments are doing. This might make you sell at lows and buy at highs. You invested due to some reasons, and while the reasons that make you invest in something do not change you should not care about the short and medium term price action. History teaches us that in the long run a buy and hold strategy in a diversified portfolio should enjoy significant returns. Just to put an example, there is no 20-year period in the history of the NSE in which, after adjusting for inflation and accounting for dividend reinvestment, you would have had a negative return. I understand that the fact that this hasn’t occurred yet doesn’t mean it will never occur, but is just some nice food for thought. So, once you invest, stay patient and calm, try to keep emotions out as much as possible and only rebalance your portfolio once some change in the markets makes your portfolio inefficient.

10. Stay current with what’s happening in the world
There will be economical, political, environmental, social… and many other types of events that are going to be affecting your investments. It is really important that you understand what is happening in the different fields that affect your investments in order to understand what can happen to them. An early identification of a future trend can save you or make you a lot of money. Imagine that you have a lot of your money tied up to oil related investments. If suddenly a new energy is discovered that can displace oil due to its better characteristics, cost, quality, power, availability, environmental impact, accessibility… you might want to start limiting your exposure to oil, and the only way to find out about this type of news is by reading what’s happening in the world. I recommend to always read the news from different countries and also associated to different types of political affiliations because how some news are presented will be affected by the background of the news provider.
Keep on optimizing your strategies.

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Optimize your investment strategy with these tips

After the 2008-2009 consolidation in the banking sectors, there was a massive boom in the Nigerian Stock Market. This made a lot of people to invest in stocks. But not long thereafter, many of them lost their investments, because they were ill-prepared before dabbling into the market. To avoid making some of the mistakes you have to take heeds to some of these admonition before you invest in shares:

Seek advice

Working with a qualified financial adviser is one way to make a real difference to your wealth. An adviser can help you shape your investment goals and strategies and provide peace of mind when markets become more volatile. There are many investment bankers around who could be of help to you.

Educate yourself

Education they say is power. An informed investor is a good investor. So, be abreast with the happenings in the financial market. Get analysts’ reports on the shares you are planning to buy. Issues like changes to interest rates, currency movements and any geopolitical issues that have the potential to move markets must be of interest to you.

Keep an eye on fees

The fees you pay will affect the return you achieve from your investments. So make it your business to understand the fees you are paying on your investment as well as the fees you pay to your adviser. This little money often adds up to be substantial amount if you don’t keep tab on it.

Consider the impact of forex on your portfolio

Currency movements can have a significant impact on your overall return, both positively and negatively. Whether you choose to hedge your currency exposure will depend on your view of how the value of the currencies to which you are exposed will move. Some investors wish to be exposed to currency movements and others don’t. What is important is to work out which camp you are in and structure your investments accordingly.

Set your investment timeframe

It is easy to be caught up in short-term market moves. And if you like to trade assets on a short-term basis it’s important to keep a close eye on what is happening in markets at all times. But if you have a long-term view, avoid basing investment decisions on what is happening in markets right now. You should be concerned about long-term factors.

Buy when prices are down

Sometimes, it is a prudent strategy to buy quality stocks when their values are depressed because of short-term issues affecting the price of the stock. This can be a great time to buy. But make sure the business is not in a sector experiencing structural decline, satisfy yourself the problems are of a short-term nature only and make sure the business has the potential for long-term growth.

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Leadership: Why Nobody takes Nigerian Youths Seriously

The idea of Nigerian youths in politics and governance has been advanced by several youths and youth groups in recent times. The argument we made back then, remains the same today. The idea of youth as leaders of tomorrow has reduced a demographic majority to a political minority. What this means is that while the youths control the majority of votes cast during elections, they end up controlling nothing after politicians win elections.A close look at the history of Nigeria shows how much the youth have featured prominently in political leadership and governance. But in recent times, the story is not exactly the same.Shehu Shagari became a Federal Legislator at the age of 30 and a Minister at the age of 35. M.T. Mbu became a Minister at the age of 25 and Nigeria’s High Commissioner to the United Kingdom at the age of 26. Richard Akinjide became Minister of Education at the age of 32. Maitama Sule became Oil Minister at the age of 29. Audu Ogbeh was a Minister at the age of 35. He is still serving today as a minister. And the list goes on.In contrast, today’s reality is a polity where Nigerian youths are used as election consultants, social media battalions, and political thugs. Many have blamed the new trend on a conspiracy of the elite class who just cannot stand the idea of vacating the scene for the younger generation creating a system that makes it impossible for young people to emerge and succeed in politics and governance. While this perspective is not entirely incorrect, there are more than enough premises to validate the argument that Nigerian youths are their biggest problem.Greed, selfish ambition, lack of capacity and “over-competition” have conspired to weaken the ability of Nigerian youths to collaborate effectively as a united front that advances the well-being of young Nigerians.Let’s look at some of the challenges that have constrained the Nigerian youth to the fringes of political leadership and governance and why nobody really takes them seriously.First, selfishness. The idea that you must have everything for yourself alone and others can go to hell is a predominant characteristic of young people today.Then you have the integrity challenge. Young people cannot expect to be trusted with leadership if they insult politicians in the social media one moment and the next moment approach these same politicians cap in hand.The third is the mentality of every man for himself; the idea that you must demonize and destroy other youths as long as it guarantees you a spot at the top.Lack of capacity is another major issue. The urge by youths to arrive quickly at the top without first subjecting themselves to building capacity going through process; mentorship, followership, and apprenticeship. Today, many young people want to own a company and lead an organization, even when the capacity for such leadership is lacking.We must not forget poverty. Many youths are constrained by sheer economic pressure and find themselves ready to do anything for survival.Competition in place of healthy collaborations has turned many young people into rat race runners who feel compelled to prove a point that they are the best at what and end up not seeing any good in others.A recently disturbing trend is the rising wave of intolerance to dissenting viewpoints and ideologies. Come to the social media and see what young people are doing to themselves in the name of politics and the superiority contest to establish who holds the best opinion.The ‘Pull Him Down’ syndrome is a predominant characteristic of today’s youth. If it’s not me in that position, whoever else is there must be disgraced, embarrassed and pulled down.Frontline Nigerian blogger Linda Ikeji bought a house and the greatest noise came from young people like her. There was even a time attempts were made to take down her blog.Audu Maikori was arrested for a Facebook comment he apologized for and some youths in the Nigerian social media wanted him jailed.But on a serious note, these are reflections of what young people do to themselves in the name of competition and survival and these are the complicated symptoms that characterize why young people are failing to organize themselves effectively into a powerful bloc of change makers who can inspire true leadership beyond exploits in business and the creative industries.Looking at the concept of political participation and the way forward, it is instructive to note that Nigerian youths must wake up and face the reality that their votes on election day gives them enough power as youths. It is a necessary first step but it is more complicated than that.If you observe critically, you will discover that what most young voters are able to achieve on election day is to validate the options presented to the electorate by political parties. What this means is that the voter is not really the one who wields political power but the party people who decide the candidates we all vote for on election day. The far-reaching implication of this is that when party A and party B give us bad candidates, whichever candidate the majority decides ends up being a bad leader anyway.Going forward, the key to effective youth participation in politics and governance is to begin to get involved at the political party level. That is where all sort of characters we disdain as leaders first emerge. If we are not involved at the level of the parties where decisions are taken on the candidates presented to the electorate, the youths, despite their demographic majority, are unable to effect real change.But let me sound a note of warning. The advocacy for more youths in politics and governance does not automatically guarantee good governance. A corollary to the earlier context I provided is the fact that there are young people who are incompetent, dishonest and corrupt. I have been a passionate advocate of youth in politics and governance but I’m always quick to add that they must be young people with character, integrity, a pedigree, and a track-record. In Nigeria, we don’t look at track records anymore. We need to start really looking at people’s track records, what they have done and where they are coming from.Packaging and social media followership is the language of today’s generation, but it does not qualify you for leadership. Young people must start asking aspiring leaders, especially fellow youths: what have you done? Show us your resume.We must also encourage young Nigerians to build capacity first before parading themselves as superstars. There are no short cuts. A good number of our elders may have stumbled on leadership at a very youthful age, but increasingly, today’s reality requires competence and hard work.All youths cannot go into politics but many of them; the competent ones with character and integrity must get in there. And their fellow Nigerian youths must encourage and not demonize them.Conclusively, young Nigerians will need to also understand that as youths, we are not in a rat race competition. We can coexist to ‘coopete’ – working together even when we have different targets and aspirations. We all need to start looking at ways we can collaborate as young people across political divides. We must learn from the older generation and how they team up together to advance their interests. Enough of this politics of Party A versus Party B that has turned young Nigerians who were once friends into public enemies. This is the only way we can begin to win and change Nigeria together.

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Money mistakes to avoid this year

Making financial mistakes will leave you financially stagnant which is why you need to avoid it to achieve your financial goals in the New Year 2018.Here are five financial mistakes you must avoid in 2018

1. Living beyond your means. Living beyond your means while the little finance you have is going down the drain is really a drastic financial mistake you must avoid in 2018. Stop living beyond your means. If you keep living an expensive lifestyle you cannot maintain, you end up trying to borrow money from people to keep up with that lifestyle, which leaves you in serious debt and incurring debt is bad for your finances because your focus would be on paying your debt instead of focusing on your financial achievements

2. Taking risk you cannot afford. It is good to take reasonable investment and business risk but if you cannot afford such risks, don’t take such risks.Before taking risks, be sure it is worth it and make sure you can afford it.

3. Waiting to invest. Do not wait to have a large chunk of money before you think you can start investing.The best time to start investing is now. No matter how small the income, you should set some money aside for the sole aim of investingThe earlier you start investing, the faster and better you achieve your financial goals.

4. Not saving for retirement early. One of the worst financial mistakes is not saving and planning for retirement early in life.You might think planning and saving for retirement early is a waste of time because you have other financial obligations to meet but you might regret your decision in the future.The best time to start planning and saving for early retirement should be in your 20s when you are already earning an income.

5. Allowing money drain. It’s not a bad idea to enjoy yourself once in a while but if you make it a daily routine to spend so much money then you are making a big financial mistake.Stop wasting money. You should abstain from bad money habit that leaves you broke such as gambling or spending on impulse.Such habits don’t let you achieve your financial goals.

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