This is why you should consider investing

Fixed income earners are hit the worst as they are like sitting ducks affected by the tide of inflation. Government has been forced to devalue the Naira as a result of inflation but that has been of little help. Today in Nigeria, minimum wage is less than the cost of a bag of beans. 

The National Bureau of Statistics (NBS) put the CPI Inflation Rate in Nigeria at 15.63%. This means prices of goods and services in Nigeria has increased by 15.63% Year over a Year.

Every Nigerian should consider Investing their funds otherwise they could miss out on creating enduring wealth as we will be discussing further.

Keeping cash is not so good an idea. Apart from it being prone to theft or even being destroyed in fire outbreaks or other unforeseen events, it will still be affected by inflation and you don’t earn any interest by holding on to cash. 

Inflation is simply the increase in the cost of goods and services measured over a period in an economy.

If you keep N100, 000 cash in a piggy bank, with the current inflation rate of 15.63%, at the end of the year you would still have the physical cash of N100, 000 but its purchasing power would have gone down by 15.63% of N100, 000 or by N15, 630. 

That is to say N100, 000 minus N15, 630 which equals N84, 370

“N100, 000 cash saved in your piggy bank after one year would have a purchasing power of N84, 370”

Okay, what if I save the money in a bank savings account? 

Saving the money in a bank might protect it from physical theft but not from inflation. 

An average Savings Account or Fixed Deposit account in Nigeria today offers around a 2% interest rate which is still dwarfed by the inflation rate of 15.63%.

If you save N100, 000 in a bank account or a fixed deposit account for a year, the bank pays you an interest of 2% which is N2, 000 while inflation reduces the value of your money by 15.63% which is N15, 630.

The real value of money you are left with is N100, 000 plus N2, 000 minus N15, 630 which is N86, 370

If you were saving to buy food stuff with the money at the end of the year, I’m sorry the price of food stuff would have gone up by 15.63%. 

Simply put your N100, 000 saved in a bank for one year can only buy goods worth N86, 370 by the end of the year.

Currency Devaluation Causes Inflation too

Let us also note that the Nigerian economy relies heavily on imported products. We import products like refined fuel since our refineries cannot match our consumption of fuel.

Now for Nigeria to import say fuel we need foreign currency. We don’t pay in Naira. 

The value of Naira has weakened over the last few years, which means that the buying power of your savings has decreased in this period. 

Foreign exchange is earned when we export or sell commodities and products to foreign countries. For us to be able to get patronage from the international market our commodity prices like price of crude oil or whatever we are exporting need to be competitive and similar to that of our competitors.

If the price of our exports are higher than that of our competitors, they may choose to buy from our competitors. The government might want to devalue the currency or weaken the Naira to make prices of our exports competitive and attract buyers.

A weakened naira leads to inflation. Imported products paid for in foreign exchange (e.g.: fuel, food items), become more expensive to import.

The extra cost is passed to the ordinary consumer like you and I and that is one way inflation is caused.

Investing your money has to do with acquiring assets with long term prospects in mind. Investors add assets to their portfolio and wait for them to grow and mature. They are interested in the balance sheet of the companies whose stock they own and they benefit by receiving dividend payments every year from the companies.

Investors are not so much concerned with the present, but the distant future. Even when the price of a stock plummets, they do not sell, they are hopeful it will recover. Most of them invest in the capital markets or in Real Estate. 

Traders on the other hand are not looking at the distant future while taking decisions, they are looking to buy and sell as quickly as possible and get out of the market. Their transaction frequency is high.

For example, a day trader involved in forex trading in Nigeria via an Online FX Broker would look to buy or sell currencies with an aim to profit from the price movements of a currency pair. They are not necessarily interested in the fundamentals of a currency pair.

Traders use charts to attempt to predict market price movements on a security and trade on those movements. They are not interested in the history of the companies whose stock they are trading in, or any other asset class for that matter.

Most traders are not successful because of the risky nature of online trading. The ones who are successful are usually institutional investors and most times it’s because they have the wealth, manpower, access to large sets of data and the technology to trade effectively and speedily.

Looking to create enduring wealth? Then stick to being an investor.

Investing is a safer way of creating wealth. It is less risky and more profitable in the long run. It enables financial independence and with the right investments in place you may decide to retire early and pursue your passion.

When you invest in real estate, you can collect rent and increase the rent when necessary to match inflation. Real estate is one of the safest investments especially in Nigeria.

When you invest is stocks, you own part of the company and you also are paid dividends at the end of every business year. These dividend payments are a steady source of income and last throughout the lifetime of the company. You still have the option of selling your stock if the need arises.

These dividends will be paid even after you die. Your next of kin will become the beneficiary. 

Will Inflation affect the value of my Equity Investment?

Yes inflation could have a negative impact on your investment portfolio but there’s light at the end of the tunnel. 

In order to mitigate the effect of inflation on your equity investments, it is advisable to own stocks of companies that have the ability to withstand inflation or pass the cost of inflation to their customers without affecting their profitability. The customers have no option than to keep patronizing the company’s product even when the cost of doing so increases. You need to study the company history and how it has fared in the past during periods of inflation. 

It is also wise to diversify your investment portfolio having a good mix of stocks, commodities and debt instruments. Investing in gold is also advisable as gold has a history of not being affected by inflation.

I suggest 30% of your portfolio should be in Index funds like ETFs (exchange traded funds) which are a combination of different stocks, 15% could be in debt instruments like government bonds, 25% in growing companies and the remaining 30% in blue chip companies.

We all have different reasons for investing.

Some people are advocates of the F.I.R.E. movement where they seek financial independence to retire early, some want to leave a fortune for their children, buy a home, start a business, some even want to pay for a ride to visit space before they die and so on. 

Knowing why you are investing helps you design a portfolio that fits that goal.

A person hoping to retire at 40 will need to build a different investment portfolio from one hoping to retire at 65. It is also advisable to amend your investment goals from time to time as unforeseen situations arise. 

We should all have an investment portfolio and teach our children to do the same. While working and earning a wage, part of it should be dedicated to building an investment portfolio. By doing this we will attain financial freedom and be able to do the things that really matter to us.

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