A few months ago, we conducted a Survey to get a feel of how our readers related with their money. One important question that we asked was "What kind of financial advice would you say you need?" and the answers we got were quite telling; about 65% of the survey participants asked for one form of investment advice or the other. So, this article is an overview of the basics you need to know if you're thinking about investing in Nigeria. To find out when we release new articles delving deeper on the topic, subscribe to DailyKobo for free by clicking here.
Investing can understandably be confusing and until you know what you’re doing, it will probably feel a lot like gambling. However, taking the necessary steps to understand how to invest will set you on the right path to increase your earning potential and achieve your financial goals. The first thing to understand about investing is that there is no ‘one size fits all’ approach because everyone has different levels of income, financial obligations and tolerances for risk.
For instance, let’s say on one hand, we have a 23-year old lawyer living with his parents, who wants to invest for future Financial Freedom. On the other hand, we have a 50-year old doctor who wants to invest for some extra cash to put her kids through school. What these two individuals will invest in would be quite different. Why? Well for starters, they can’t afford to take on the same amount of risk.
The 23-year old lawyer has little to no financial obligations and time on his side to make money back if his investments don't go according to plan. However, the 50 year old doctor, who has school fees to pay, doesn't have the same luxury of time or freedom because of her kids' school fees. Its always important to invest in accordance to your financial situation.
So, the next question is how do you start investing in Nigeria? Well here are four steps to help you do just that:
(1) Clarify why you want to invest
The first step to investing is highlighting your investment goal, why do you want to invest? The reason why you are investing will influence your ability to take risk and invariably determine what the kind of investment you will make. You could be investing for your future, for a particular financial goal or just because you want your money to work for you, but why you want to invest needs to be clear.
For instance, the 23-year old lawyer, who has the goal of future Financial Freedom, would likely have an above average ability to take risk and could opt to invest in relatively risky investments like stocks which will give him a very good return over the long run. However, the 50-year doctor, whose goal is to make some extra cash to pay for school fees, will most likely have a below average ability to take risk and should probably opt for investments that protect her principal investment such as government bonds and other fixed income assets.
Neither of these two investments is better or worse than the other, it all just depends on matching one’s willingness and ability to take risk which is very important. Willingness comes from your desire while ability depends on a combination of your financial capacity, your age, your liquidity needs and how long you expect to hold the investment. You'll get a better idea of what you're realistically able to invest in after speaking to an investment adviser, which leads us to the next step.
(2) Bridge the knowledge gap
After you’ve clarified why you want to invest, the next step is to bridge the knowledge gap i.e. increase your understanding of investment. This understanding could come from a variety of sources, in fact, you reading this article is already a step in the right direction. However, the people in the best position to properly educate you are professional investment advisers.
You can check here for the names and addresses of some investment companies that are within your vicinity. To fully begin your investment journey, you'll need to go to one of these firms to discuss with an investment adviser (for free) in order to get a better idea of what investment product suits your current situation. Some questions to ask the investment adviser that will bridge the knowledge gap are:
Investment plan: What will they be investing your money in? Stocks? Bonds? Real estate? What percentage would be allocated to each asset (i.e. will the product include 80% bonds and 20% stocks?) and is there any minimum amount required? (For instance, investing in stocks requires a minimum amount of ₦50,000)
Risk: How risky is this investment? With some investments, there is a chance you could lose a portion of your principal investment, although those types of investments attract better returns. Ask how risky each investment product is to see if it matches your tolerance for risk.
Profitability: What are your expected returns on the investment? Are the returns guaranteed or is there a possibility of a reduction if the market conditions change?
Liquidity: How much access do you have to the money invested? If you want to withdraw your investment prematurely, will there be any penalties? If so, how much?
When the investment adviser has fully answered these questions, you should have a clearer picture of what investment product matches your lifestyle, financial situation and tolerance for risk.
(3) Develop an investment plan
The next step is to develop an investment plan, this is usually where a lot of people feel they earn too little to start investing. If you feel this way, set a target amount you want to have before investing, set up a savings account and then build from there.
Related: How to get a grip on your savings.
However, if you feel you are ready to start investing now, your investment plan should comprise of how much of your money you want to start investing with and how much of your salary you are willing to add to that investment on a periodic basis. This is also where you decide what percentage you would like to invest in each asset class (say, 70% in equity and 30% in fixed income).
For instance, ARM Securities has a money market fund which invests in secure government bonds on your behalf; an example of a simple investment plan would be to start with an initial investment of ₦40,000 and then make contributions of ₦10,000 every month. Your investment plan will depend on your reason for investing and the information you get from the investment adviser regarding your ability to take risk.
(4) Choose an investment firm
I used ARM Securities as an example in the Step above, but there are actually quite a lot of investments firms in Nigeria for you to choose from. In fact, the Nigerian Stock Exchange (NSE) publishes a list of the top ten brokers by value and volume every week, meaning that these are the top performers in the market with the highest volume and value of transactions on the stock exchange. You can find these publications here, but it’s important to note that because they are the big players in the industry, their charges might be slightly higher than others.
You can use that list to guide your decision on what investment firm to choose or you can choose an investment firm that is the most convenient for you but the important part is to start investing early. It is important to start investing early so that you can fully capitalise on the power of compounding which allows you to make money not just on the amount you invest but also on the interest it earns, so the earlier you start, the better.
Well that’s it for now, I hope this introductory piece has been useful enough to help you take the necessary steps to start investing. Choosing to invest, if done properly, can be a life changing decision that will increase your earning potential exponentially. The earlier you start, the earlier you can begin your journey to Financial Freedom. Take Care.
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