INVESTING YOUR MONEY

Investing is like planting a seed so that it will germinate, grow and bear fruits. Your money is seed that God has put in your hands. You can decide what to do with your seed: you can either plant the seed or eat the seed. Let me draw from the Parable of Talent as told by our Saviour Jesus to amplify this point. The master in this parable gave out 5 talents to one servant; he gave 2 talents to another servant; and he gave one talent to the third servant. The ones who got five talents and two talents went and traded with theirs and multiplied their talents that the master gave to them, while the third servant who got one talent went and dug a big hole and hid the talent in, and the talent did not grow.

 You can see from the parable of the talent that earning and saving money is not enough, as it will not grow and multiply until you start investing. So, if you desire to be wealthy, then you must save your seed(money) and invest it so that it will multiply and create wealth for you and your family. In this piece, I will be providing you with practical guides that will help you to jumpstart investing now.

 Why You Should Invest

As I earlier mentioned, you can not build wealth if you do not invest. The main reason why you must invest is that investing allows you to benefit from Compound Interest Effect. It is compound interest effect that makes people wealthy; except people who rob a bank or embezzle public funds in government offices. Nobody can build wealth without benefiting from compound interest effect. It can grow a $1 investment into million of dollar investment with the passage of time. What is this compound interest?

 Compound Interest: Compound interest is referred to as the “Eight Wonders of the World”. It is the interest calculated on the initial principal plus the interest calculated on the accrued interest earned in the previous period. Compounding interest simply means interest on interest. For every N100 that you invest, you are assured that it will grow as each day, week, month, and year pass. While for every N1,000,000 you spend, be assured that it will never grow again, especially if it is not spent on productive assets.

Let me give you an example to demonstrate how you can benefit from compound interest when you invest. Lets assume that you have set a plan to set aside N100,000 from your income annually to invest. Assuming the average annual interest rate is 7% and you plan to invest this amount for 5 years.

Yr Principal Future Value

1  100,000.00  107,000.00

2 100,000.00  221,490.00

3  100,000.00 343,994.30

4 100,000.00 475,073.90

5 100,000.00  615,329.07

 You can see that over the 5 years, the N100,000 you saved yearly has grown to N615,329; part of this amount is your principal (N500,000) and N115,329  is the interest that your investment has earned over 5 years. If you continue to save consistently, with the power of compounding interest, both your principal(N500,000) and your interest (N115,329) will continue to earn interest, which will cause your money to keep growing.

 UNDERSTANDING THE PRINCIPLE OF PORTFOLIO AND DIVERSIFICATION

When I am talking about investing, I am talking about building a portfolio and diversifying risk. Portfolio and diversification is the ONLY investment principle which means spreading your money across different investments so that any loss in one investment will be compensated by gains in others. It is the act of putting your eggs in different baskets so that if one basket is destroyed by accident or due to forces beyond your control, the eggs in other baskets would be safe and can help you to continue with your life and business.

 There are different investable assets that you can use to build your portfolio and diversify risk. These are stocks, bonds, money market instruments like treasury bills, mutual funds, real estate properties and commodities.

I have provided four steps you need to follow to build your first portfolio.

·        Determine Your Asset Allocation: This is the first step as you need to identify the assets that you wish to invest your money in. Is it real estate(houses); it is stocks/equities; is it bonds? Etc. But before you determine how much you want to allocate to these assets, you need to assess your current financial situation. You need to determine you time horizon as well as your risk appetite. Time horizon is the number of years you want to invest, and your risk appetite is your ability to tolerate fall in price of your assets without panicking. Young people often have higher risk appetite than old investors and can afford to allocate their money to risky assets like stocks that produce higher returns.

Depending on your current financial situation, time horizon and risk appetite, you can allocate your money among two or three assets that we have mentioned here: Stocks, bonds and money market funds; or money market funds and real estate properties. You may build a portfolio like this: 50% real estate and 50% money market. This is a conservative portfolio from someone who does not want to invest in risky assets like stocks. Another person who is a bit aggressive and has high risk appetite may choose to allocate their asset to a portfolio like: 50% stocks and 50% money market funds.

·        Executing the Portfolio: Once you have determined your asset allocation among the identified investable assets, the next step is to implement your portfolio plan by dividing your capital and putting it in these different types of investments you have identified in step one above. These days, technology has made is easy to access the capital market and buy these assets. For example, if you wish to invest in a bond fund, and money market fund you can visit playstore app or IOS app store on your mobile phone and download investment apps licensed by Securities and Exchange Commission to register and invest. I can recommend two apps for you: Cowrywise and FBNQuest apps for your investments.

·        Re-Assess your Portfolio Weighting and Re-Balance it: Your financial situation and risk appetite which initially determine your portfolio configuration will change over time, hence, you will need to check your portfolio weighting and re-balance it to suit your new financial situation and risk appetite. For example, if you now need more cash and wish to depend on your investment to withdraw the interest for your living expenses, you may have to re-balance your portfolio and re-allocate higher weight like say 70% in money market fund and 30% in bonds. Or let’s say your children you were sponsoring in the university have all graduated and have got good jobs, and they are now sending monthly stipends to you; hence, you do not have to depend on your investment to pay living expenses, you can rebalance your portfolio to allocate more money to real estate and less to money market funds- 70% real estate and 30% money market.

Always follow portfolio approach when investing to prevent burning all your capital in one investment.

 TYPES OF INVESTMENTS

There is wide spectrum of assets that you can invest your money in, to grow your money and build wealth. I have picked some of the handy assets and explained them below for your action.

·        Stocks or Equities: stocks refers to ownership interest in a company. A buyer of stocks of a company becomes a part owner in that company and has acquired the right to participate in decision making as well to benefit from amount of profit shared by the company called dividends. If you choose to invest in stocks, you too can become an owner in great companies like Apple, Dangote Cement, Nestle, MTN, GTBank, etc.

 To invest in stocks, you will need to open a brokerage account with a licensed stockbroker that has been cleared by Securities and Exchange Commission(SEC) to carry on the business of helping the general public to buy and sell stocks. I believe that technology should help us ease stress and do things faster and better. Accordingly, I have recommended online stockbrokers here for you. These are:

 Meritrade- this is owned by a SEC licensed stockbrokerage firm called Meristem Securities. The minimum account opening balance is N10,000 and the brokerage fee for buying and selling stock is 1.35%

 Chaka.ng- Do you want to become a shareholder in Apple and Google and Facebook and enjoy from the growth of these companies? Then Chaka.ng is an innovation that can allow you to buy and sell both Nigeria and American companies shares right on your mobile phone. Chaka is owned by Citi Investment Capital Ltd, a SEC licensed stock brokerage firm. The minimum balance for opening account is N1000 or $10 and transaction fee is $2 for international stocks and N100 for local stocks.

 Mytradebook.com- This is online trading platform of Greenwich Securities and is licensed by Securities and Exchange commission. The minimum account balance here is zero Naira and they got a mobile app for both android phone and ios for your use.

 Investing in stocks is very risky and can give high returns as well. So make know your risk appetite before you can invest in stocks. Again, remember to build your portfolio well.

·        Bonds: Bonds are debt securities issued by governments and companies to raise funds for their investment. Entities that issue bonds undertake to pay investors who buy the bonds a fixed interest at a given period of time- semi annually or annually. Bonds have the lowest risk among all the types of investment that I have discussed here. In fact, bonds issued by government are referred to as “risk free” assets.

   You can easily invest in bond funds issued by investment banks that are licensed by Securities and Exchange Commission (SEC) using your mobile phone. I will recommend some great apps for you: Cowrywise, wealth.ng and FBNQuest app called FBNEdge.

·        Money Market Instruments: Money market instruments such as treasury bills are short term debt instruments issued by the Central Bank to borrow from the public periodically. Money market instruments are highly liquid, i.e they can easily be converted to cash and have a short maturity period of 90 and 180 days. This is the right type of investment for investors who prefer to invest for short term and want to hold more liquid assets.

Mutual funds have made investing in money market instruments easier now than before. You can simply invest in a money market fund managed by mutual fund managers. I have a few recommendations here for you to help you invest in money market funds. I recommend these SEC licensed investment apps for your use: Cowrywise, FBNEdge, PayDay investor, and wealth.ng app.

·        Real Estate Assets Investment: Real estate investment means investing in land properties to benefit from rents and value appreciation over time. You must invest in real estate because real estate is an investment that defends your money against inflation as the value of property as well as rent rise in the same direction with general price level in the economy. In addition, real estate provides double sword returns on your investment as investors receive rental income consistently and benefit from rise in property value.

 There are different ways to invest in real estate and I have explained some of these below.

Become a Landlord: You will need to set aside money to buy plot(s) of land and build family houses to rent them out to tenants. You can also buy already developed houses in an estate and rent them out to earn rental income on your investment.

 Real Estate Investment Trusts(REITs): REITs are mutual funds for the real estate in that the trust company gathers a pool of fund from different investors and invest same in real estate properties to generate rental incomes which are distributed to investors in the trust. The trust company that organizes the REITs is responsible for managing the estates and properties built with investors funds as well as collecting the rents from tenants. Annually, the rent collected is shared to investors who have invested in the REITs after paying all building and property maintenance expenses.

 There are three types of REITs:

-Equity REITS: These are REITs that own and manage real estate properties with a view generate rental income.

-Mortgage REITs: These are REITs that do not own and manage properties, but rather invest in mortgage loans taken by others to build properties. Although the properties built serve as collateral, these REITs do not own them.

-Hybrid REITs: These REITs both own and manage real estate properties and also provide mortgage loans to people who want to build properties.

 The government does not tax the money generated from rental collection from tenants by the trust company provided the trust company distributes up to 90% of the rental income to investors in the REITs. So, REITs provide tax savings to investors. REITs are also liquid because they are traded on the stock exchange and investors can sell their units of shares anytime if they want to realize their capital.

 There are three REITs currently in Nigeria. These are UPDC Real Estate Investment Trust; Union Homes REITs and Skye Shelter Fund PLC. These are all listed on Nigeria stock exchange and have ownership of choice estates in premium areas of Lagos like Lekki, Ikoyi and Victoria Island.

 Do you want to become a landlord in Lekki with just N50,000 ? then invest in any of these REITs. You can consult your financial advisor to help you get a piece of the pile called REITs.

 Land Flipping: This is a way of investing in real estate by buying land and buildings at a low price and selling it at a high price. This requires large amount of capital and the deep knowledge of property market in the location where the investor is doing flipping. There are locations where land and property appreciate value steadily every year. For example, if the value of property appreciates by 10% every year in an area that you are familiar with, you can buy properties in that area and hold it for year, and sell to make a gain. Based on the estimated property appreciation rate of 10% per year, your money would have grown by 10% in a year.

·        Commodities: Commodities consist of agricultural cash crops and minerals which are traded and used mainly as raw materials in industries for production of other goods. The commodities you can invest in include grains like soybeans, sesame seeds, cocoa, oil palm, cashew nuts, rice, groundnuts, etc. Minerals such as gold, diamond, crude oil, etc are also traded as investable assets.

 So how would you invest in commodities? There are two ways to invest in commodities. First is to get a warehouse and buy commodities like soybeans, cowpeas, cocoa, cashewnut, sesame seed, etc during harvest when prices are generally low from production states, like Ondo, Benue, Nassarawa, Edo, Ogun, etc and store. You may hold your storage for a period of between 3-6 months and sell off when prices would have appreciated. Even in this, remember to build a portfolio to diversify your risk: Do not buy and store only one commodity. Spread you money across two or more assets like cocoa and melon and soybeans. This is because the price of soybeans may perform poorly in a given year, but rising prices of melon and cocoa will help you to make good profit. Commodities produce average return on investment of 24% annually on the average.

Another approach to invest in commodities is to fund a farm via aggrotech finance companies who pool the fund from different investors and sponsor a farm in a farming cycle. The agrictech firm sale the harvested crop and sale it and distribute the proceeds among investors, the farmer and also take a percentage for their management fee. The leading aggrotech firm in Nigeria that I will recommend is farmcrowdy. You can download their mobile app on playstore by searching for Crowdyvest; download and register to sponsor a farm. They are very reliable and have ambitious plans to revolute agriculture in Nigeria. They are also working closely with Securities and Exchange Commission(SEC) to finalise a draft regulation to regulate such crowd funding Tech firms in Nigeria. So, fear not to invest with then in commodities.

On a final note, let me repeat that investing means building a portfolio and diversifying your risk. So, do not put all you money in one investment asset no matter how promising it looks like. Always build your portfolio following the steps I have explained above and invest consistently over a long term.

 In addition, investing for the purpose of building wealth is for long term and not short term. So, have a long-term mindset as you decide to set aside a percentage of your income in a year to begin to invest.