What’s the Best Way to Invest ?5 Million?

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Question

Can you suggest the best way to invest ?5 million for just a year (from now till July 2023)?

Answer

Investing as a beginner could be somewhat tricky because of all the many options available. Investment options vary across asset types, sectors, countries, etc. As a result the question of where to start from becomes a challenge. Let’s first understand the following:

• How investments work;
• The various investment options available to you; and
• How to decide what to invest in.

How Investments Work?

An investment is an asset that is purchased in the hope of future returns. An important concept to understand when it comes to investments is the “risk-return” concept. All investments are prone to different degrees of risk. The higher the risk, the higher the potential return. The lower the risk, the lower the potential return.

Various Investment Options Available To You?

Generally, investments are grouped as

• Low-risk assets: These are investment assets that are subject to very minimal risk. They also have potential for minimal returns. Examples are fixed income assets (eg. treasury bills, bonds), high-yield savings account (HYSA), etc.
• Medium-risk assets: These are investment assets that are prone to risks from price fluctuation, although the risks are minimised. Examples of medium-risk assets are private sector fixed income assets, physical real estate, etc. One can invest in real estate by buying properties at a fair price to either resell or make rental income from. Another way to invest in real estate is through Real Estate Investment Trusts (REITs), that is, investing in companies that own real estate properties. However, not all REITs are medium-risk assets.?
• High risk assets: These are investment assets that are exposed to frequent and sometimes drastic price fluctuations. This, therefore, poses a great risk and potential for high returns. Examples are stocks, cryptocurrencies, etc.?

How To Decide What to Invest In

To decide what to invest in, you need to be prepared to do some research. Here are some tips to keep in mind:

• Identify your level of risk tolerance: Just as people differ in shapes and sizes, so do people differ in their tolerance for risk. This is why it is difficult to make a generalised investment plan. To identify your risk tolerance, you will need to answer some questions: What is the fund for? Is it your life savings or is it just extra funds? Is it for your school fees such that you can’t afford to lose a penny? How long are you willing to have your money tied to the investments for? Do you have a steady source of income besides the funds you have decided to invest? Answering these questions will inform the way your portfolio will look like.
• Diversify your portfolio: An investment portfolio is a combination of different assets. Ideally, an investor should not invest all funds in a single asset class. This gives more room to minimise risks and maximise potential for returns. Based on your risk tolerance, your investment portfolio will contain low-risk, medium-risk, and high-risk assets in different proportions. Here is an example of how an investment portfolio for a risk averse investor will look like:
• 50% (i.e. ?2.5 million) will be invested in low-risk assets.
• 30% (i.e. ?1.5 million) will be invested in medium-risk assets.
• 20% (i.e. ?1 million) will be invested in high-risk assets.

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Question

I am a 20-year-old student and I currently earn in dollars and naira. In total, my take home salary is about ?280,000 per month (depending on the exchange rate). My goal is to have a diversified investment portfolio, spend money without guilt and save up for my 21st birthday trip next year.

My questions are:

1. Where do you advise I invest considering these factors??

2. Suggest what apps or tools I can use to invest.?

3. I currently use this allocation: 50% (savings & investment), 20% (monthly expenses), 10% (emergency funds) and 20% (birthday trip). Is this wise? Should I change or adjust anything?

Answer

Well done to you for having your finances in order.?

Answer to question 1: Please refer to the answers provided above. This will help guide you to build your investment portfolio.

Answer to question 2: There are many apps that grant access to foreign and local investment assets like stocks, ETFs, REITs, etc. To decide which to use, make sure to ascertain that the companies that own these apps are licensed and registered with the Securities and Exchange Commission (SEC). This is how you can guarantee the safety of your invested funds. Also, ensure to compare fees and transaction costs across board.

Answer to question 3: The most popular budgeting rule is the 50-30-20 rule. This rule suggests that you split your income as follows:

• 50% for needs
• 30% for wants?
• 20% for financial goals (savings, investments, debt repayment, etc.)

However, this is not a hard-and-fast rule. This proportion can be tweaked to fit your situation. What is important is for you to ensure that you not only spend your money, but you also give room for financial goals. To answer whether or not your budgeting rule is wise, you may need to review whether you are struggling to stick to your budget.?

An extra tip for your savings towards your birthday trip, is to keep the funds in a high-yield savings account. This will ensure that, to an extent, your money is not just sitting idle till you’re ready to use it, but it is working for you and yielding some more money, however little. The Ladda app, for example, provides a 10% interest per annum for savings.

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We often get questions regarding how to plan your finances to align with your relocation plans, especially for students seeking to further their studies. As always, we have heard you, and we have put together an e-book to help you navigate this. Simply follow this link, to get your FREE copy of the e-book: The Japa Encyclopedia.

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