Why invest?

This article is designed to enlighten you on foreign investments. However, before we discuss some of the complications and intricacies of foreign investments, ask yourself, what does it mean to invest and why invest?

Investment means giving up lump sums of money in anticipation of future benefits. This stream of income is essential for people who desire to be financially independent and those thinking of generational wealth. All other streams of income require that you work for money, but investment makes your money work for you. Investment, as defined, is future-oriented, therefore, it involves some degree of risk.

As a rule, before investing in any asset class, you must;

Be educated about that asset class. You need to learn to make the right investments within the asset class you choose. You must be familiar with the vocabulary, pros, and cons, best practices, among other things. Education is continuous and never rely on past successes. I have seen very successful traders’ loss it all simply because of what I call market arrogance. Study, research and if possible be part of a community where you can share tips.

Understand money management

Money management is the process of expense tracking, investing, budgeting, banking and evaluating taxes of one’s money which is also called investment management. Money management is a strategic technique to make money yield the highest interest-output value for any amount spent. Simply put, money management is what I call the psychological aspect of investing. Once you have come up with a strategy especially after thorough research, don’t just sell the investment due to panic. By all means, be flexible with the strategy in line with new research but at all cost, avoid panic. For example, one day, my stock portfolio was down by 20 percent. I didn’t panic, instead of trading, I took the day off. The next day, it got worse and by the end of the week, it was down 60 percent. Instead of panicking, I decided to buy more stocks. After two weeks, the market suddenly turned and a portfolio that was down by 60 percent went up and by 100 percent. I was able to redeem loses and become profitable. The additional stock I bought added another 30 percent to the portfolio bringing the total increase to 130 percent. I spend a lot of time teaching money management because it is the first thing investors forget when your stocks dip or when there is a downturn in the market.

Manage risk and know your risk appetite

You must understand the risk in the territory you are investing in. There are two major types of territorial / country risk. The first is an economic risk; this includes risk such as inflation which is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time. It is the constant rise in the general level of prices where a unit of currency buys less than it did in prior periods and currency depreciation which means the actual purchasing power of the currency has decreased over time. In 2015, the Naira depreciated against the dollar by 150 percent within a few months. If all one’s asset were invested in the Nigerian economy, that will be completely disastrous. People usually believe that when it comes to investing, it is best to invest in a well-diversified portfolio. A well-diversified portfolio on the stock market they argue for instance is investing in the manufacturing, pharmaceutical, financial, hospitality industry. The problem is that is there is a recession or economic downturn, it affects every sector of the economy. The financial industry is not usually protected while the manufacturing industry suffers in isolation. The second risk is political risk. There may be political turmoil, an upcoming election or civil unrest in a country. This causes insecurity and instability and markets will react. You also need to know your own risk appetite. Some investors can’t afford to lose money at all while some want to invest for the long term and are therefore not bothered by short term losses. Know your risk appetite and manage your expectations. As an investor, no matter how knowledgeable or prudent you are, you will make mistakes. The key is to quickly get over it and move on to other investments with lessons learnt. This takes me to my next point which is diversification.

Be well-diversified

It is usually profitable to invest in different economies rather than in various asset classes within the same economy. Ecclesiastes 11:1-2 (GNB) says, “Invest your money in foreign trade, and one of these days you will make a profit. Put your investments in several places — many places, (other versions say invest in seven or eight ventures) because you never know what kind of bad luck you are going to have in this world.” This is what we call diversification. A diversified investment is a portfolio of various assets that earns the highest return for the least risk. A typical diversified portfolio has a mixture of Paper assets, such as stocks, fixed income, and commodities; Real assets such as residential or commercial properties, industrial properties, land, REIT’s etc.

Businesses wholly or partly owned

You spread your risk and consequently lower your overall exposure for losses. I define diversification as the ability to invest in multiple asset class, in multiple countries and in multiple currencies.

Let’s look at these various investments in detail. The common forms of investment are discussed below;

Stocks or equities: Literally, a stock is a certificate that a portion of a company belongs to you. You can profit from stocks by receiving dividends or selling the shares when there’s a rise in the share price.

Bonds or other fixed-income investments: investing in bonds is considered to be less risky and less profitable than investing in other forms of investment. When you invest in bonds, you receive profit in the form of interest.

Cash or cash equivalents

This involves investment in the money market. The fundamental advantage of this form of investment is their liquidity, that is, ease of access.

Real estate and other tangible assets

Real estate is arguably the most common and oldest form of investment. They are often shielded against the effects of inflation. The categories of real estate investment include residential, commercial, industrial, retail, and mixed-use. Other tangible assets include gold, commodities, artwork, among others.

Futures and other financial derivatives: This form of investment include: forex market, options, and futures contracts, among others. Some people think that investing in one asset class is better than another. I must tell you that no investment class is better than the other; all investments have their pros and cons. You can make a profit by investing in any asset class, and you can make losses by investing in any asset class. Therefore, investment education and experience are important. Now we have an idea why we should invest, I look forward to introducing you to foreign investments and sharing some of my stories with you.