What should I invest in?

Nigeria is currently passing through a financial storm. Financial storms are normal occurrences. They come and go. The reason it seems to be a big deal is that we were caught unprepared.

However, getting here did not happen overnight. The handwriting was on the wall for years. Before a hurricane makes landfall, meteorologists can see it coming and give advance warning. By observing weather fronts, wind speeds, and other data, they can predict hurricanes and tropical storms.

The same scenario plays out in our personal finances. Praying against financial storms is a waste of time. What you need to do is build a solid foundation so that when it does come, you are fully prepared. This is why I emphasize the importance of a solid financial foundation when investing. You can get away with any stunt while the storm is still far away.

You can place your financial reserves in speculative investments and everything will seem to go on fine. It is when the storm makes landfall that your foundation is tested. It could be in the form of losing your job or business being down etc. Real estate vendors for example tell you your investment will double within a certain time frame as if it is a fact. I asked one to put it in writing that her company will buy it back from me for twice the price at an agreed date and she headed for the door. We often confuse facts with opinions and when the ceiling comes crashing down, we end up with the experience while the other party ends up with our money.

Where should one start investing?

In my talks and seminars, I come across many who want advice on what to invest their savings on. Generally, the best place to start is investing for guaranteed cash flow – invest in assets with guaranteed returns. The natural inclination is to look for where you will get the highest returns. Many have had their fingers burned badly in the quest for higher returns. I know folks who have vowed never to return to the stock market after getting slaughtered in 2008. Again I know folks who pulled some stunts and got away with it. Many have asked which is better – buying land or treasury bills, for example. As I usually respond – there is no one right answer. It depends. If you buy land without a solid base, you may be forced to sell when you are not ready. Real estate does not always go up. When there is a cash crunch like we are witnessing currently, you can put up your land for sale with a certain expectation but will be surprised by the offers you get. You cannot bank on always winning.

In my recent series of articles, my emphasis on building fixed-income assets through investing in the money market may come across as if I am discouraging people from taking more risks for higher returns. Actually, the opposite is true. I am preparing you for taking greater risks by having a solid foundation to launch from. If you want to become rich, you have to be prepared to take more risks. Higher rewards come from taking on greater risks. However, you need to stand on solid ground so that if your venture flops, you can live to fight another day. Depending only on one source of income is risky. You need multiple sources of income and the easiest way to start is through investing in the money market.

Security versus growth

Fixed-income assets like interest from money market investments are to provide financial security through fixed income. That is its job. It is not to make you rich. You can become rich through the money market, but it may take many decades. Its primary function is defense, like the goalkeeper and defender in a football team.

Consequently, there is no basis for comparing the money market with the capital market or real estate investment. The latter are growth investments. They give you speed, and you have to fasten your seat belt, in the event of a crash. I have gotten into debates with a friend regarding building to rent versus building to sell. Both play different roles. Building to rent generates income and capital gain over time while building to sell may give you instant profit (quick turnover). A savvy investor does both while keeping an eye on the market. Building booms do not last forever. You can build and sell, build again but unable to sell. If you borrowed to build, then you will not find it funny.

The primary purpose for investing is income. If you keep investing and get no income you soon run out of gas, no matter how much your ‘asset’ is appreciating. Anytime there is a market crash, those with cash buy at a bargain. They negotiate from a position of strength, hence the saying – he who has the gold makes the rules.

It is very crucial that you understand cash flow. A smart investor does not invest for capital gain. He invests for cash flow and gets capital gain as a bonus. He essentially eats his cake and still has it. He can capitalize on opportunities for capital gain but does not camp there permanently.

Asset Allocation

If you have one source of income, the smart thing to do is to have your money work for you by building a financial security plan through acquiring fixed-income assets. You may not allocate all your funds into one bucket. You can assign a percentage to the money market and some percentage to more speculative investments like the stock market, real estate, business, etc.

You need to be aware that you need a stable passive income. I see a lot of young graduates repeat the same mistakes we made in our days, taking it to a whole new level. After getting a good job, they get an apartment, buy a car, have an exotic wedding, get the latest toys and go on holiday. They indulge in instant gratification – using their capital to live their dreams, rather than using profit from their investments. Rather than wait for the golden eggs, they slaughter the goose.

Financial storms do not come to kill you. Like an inspector, it simply comes to test your foundation. If you learn the lessons, you emerge stronger, wiser, and ready to face the next storm. Sometimes the worst thing that can happen to you is to win, especially after making a dumb move. You think you are very smart, you learn nothing and chances are you will pull the same stunt again. When you fall, you stop and ponder. You are never the same again. I believe the same for our nation and for you.