Growing wealth in 2022: 9 asset classes you should be actively considering

view original post

For much of humanity, the new year is a time for reflection on the past and a time to reiterate your annual “new year resolutions”. “This year I must invest more”, “This year I must take my finances seriously”,This year I need to make better decisions”. Your reflection zone, the sober period. You just got off the highs of December… Detty December as it’s popularly called. The month that’s akin to a night out with your friends where good vibes and spirits push you to spend an unbudgeted $1000 while casually ignoring the fact that January is the longest month with 310 days… except that the last ‘0’ is somewhat invisible on the physical calendar.

Retail investors are often confronted with what we call “analysis paralysis” – an inability to make a decision due to overthinking a problem. “What can I invest in?” Everyone’s dilemma, the rocket science of financial planning.

The truth is there are so many things to invest in but no one invests for the sake of investing; the objective is for returns and that’s what makes it so complicated. Profit is to Business as Returns is to Investment. So, navigating the plethora of options to get returns on investments is the tricky part because of the risks that come with investing.

But let’s unpack investment options together

Important Note: (x%) = Year-to-Date returns. Year to date (Y.T.D) is a term that shows the growth or decline of an asset between the beginning of the year and the current (present) date. The importance of this metric is to evaluate how well your investment would have performed if you invested in an asset at the beginning of the year.

For example – Bitcoin’s Y.T.D is (70.43%). A N50, 000 investment in Bitcoin in January 2021 will yield a total of N85,215 (Principal + Interest) as at the time of writing (December 28th, 2021), Ceteris Paribus.

There is an array of asset classes the average individual invests in. We discuss nine of them in this article: Stocks, Indexes/ETFs, Mutual Funds, Currencies, Cryptocurrencies, Commodities, Startups, Real Estate and for some people “Personal investments”. It all depends on your risk appetite. Remember the golden rule. The lower the risk, the lower the returns, the higher the risk, the higher the ‘probability’ of returns. Keyword – probability.

When it comes to investing in stocks, it could be investing in the likes of popular US equities such as Apple (39.35%), Tesla (49.90%), Facebook/Meta (28.72%), and vaccine-producing company, Moderna (137.3%); or Nigerian stocks such as Guinness (105.26%), Dangote Cement (5.35%), bank stocks like GTB (-20%), Access Bank (4.73%), FBN Holdings (60.84%).

But cherry-picking stocks can prove tricky for the average investor and that’s where indexes/ETFs come in. ETFs (Exchange Traded Funds) are simply defined as investment vehicles that aggregate the weightings of different stocks that save you the stress of stock picking but track indexes instead. Popular indexes are the S&P 500 (27.43%) that represents the shares of the top 500 companies in the United States, or the NASDAQ 100 index (22.45%) that represents all the top tech stocks in the United States. In Nigeria, we have NGX 50 Index (0.07%), so when you buy an ETF that tracks the NGX 50 Index, it gives you ownership and the performance of all the securities listed in the NGX 50 Index. ​The ETF tracks the top 50 companies in terms of market capitalization and liquidity in the Nigerian Exchange Market.

Other options are Mutual Funds such as Stanbic IBTC Dollar Fund (SIDF) that invests a minimum of 70% of its portfolio in high-quality Eurobonds, a maximum of 25% in short-term USD deposits, and a maximum of 10% in USD equities. You can view options of some popular mutual funds such as the Nigerian Eurobond Fund (6.70%) and United Capital Sukuk Fund (7.24%) on an app called Cowrywise.

Other people invest in currencies and profit from a currency outperforming another currency – either through trading it on an exchange or by cash conversion. For example, the US dollar improved against the British pound – US/GBP (1.78%), and on the official market, the naira devalued against the US Dollar – NGN/USD (-7.30%).

Then we have cryptocurrencies, the new kid on the block that has created a new perspective in the financial markets. Initially, most people saw cryptocurrencies as one big bubble that would leave everyone in tears but it’s turned out to be the opposite for the less greedy. Satoshi’s vision was to put money into people’s hands with Bitcoin and cryptocurrency is on the way to making that possible. Traditional finance gatekeepers are looking at the party next door and waiting for the crypto music to fade away but the tables don’t seem to be turning again – people are now changing seats.

People are investing in Bitcoin (70.43%), Ethereum (436.64%), Dogecoin (3098%), and Sandbox (17,036%) amongst others. You would observe the YTD returns are very high compared to other assets mentioned earlier. But with high returns comes high risks. The crypto market is very volatile and leads to sleepless nights and compulsive checking of your Binance or Bybit apps, reminding us of the popular saying in investing – “Invest what you are prepared to lose”.  Dollar-cost averaging works best for volatile markets or a simple Buy and Hold strategy (lumpsum) – but timing the market? Impossible.

With over 16,000 alternative cryptos to choose from besides Bitcoin, an unlimited supply of easily created cryptos with virtually identical properties creates a sham environment for the naive investor. A cryptocurrency can be easily created in 10 minutes so it is important to understand market capitalization metrics, use-cases, whitepapers, and the need for a financial advisor when deciding.

However, I must add that in investment management, there’s something we call Sharpe Ratio – it’s used to compare the returns of an investment compared to its risk. While Bitcoin outperformed the S&P 500 on a YTD basis, it performed worse than the S&P 500 on a risk-adjusted basis (Sharpe ratio) as its performance should outweigh its volatility (excess risk) by a higher margin to justify its inclusion in a portfolio. This is why most large investment companies like Pension Funds do not expose their portfolio to cryptocurrencies.

Another option investors can look at is Commodities. Commodities had a decent showing in 2021 as Coffee (80%), Brent Oil (48%), Copper (25%) gave their holders good YTD returns but it was quite disappointing for other Metals and Gold (-5%) – the supposed hedge against inflation which couldn’t perform well in the most inflationary environment possible.

In the diagram below, you’ll see what a N50,000 investment would have returned from the beginning of the year to December 28, 2021.

Another interesting option new-age investors are looking at is Startups. A startup is a company typically in the early stages of its development – an entrepreneurial venture typically started by 1-3 founders who focus on capitalizing upon a perceived market demand by developing a viable product, service, or platform.

In Nigeria, Africa, and the world in general, there are few successful startups, and in the same breath, so many failed startups. The bitter truth is​​ that about 90% of startups fail. 10% of startups fail within the first year. Across all industries, startup failure rates seem to be close to the same. Failure is most common for startups during years two through five, with 70% falling into this category.

We only hear of the glamorous ones on social media when they reach unicorn status or achieve Series D/E/F funding, when it is already too late for the average investor to invest in. This buzz makes startup investing so appealing that you now begin to hunt for the next best thing, the next Uber, the next Flutterwave at their incubation stage. But the lack of publicly available data from startups makes the investment decision-making process difficult, so ‘Due Diligence’ must be done first plus beware of regulatory overreach!

When looking at real estate, there are two views to consider. Do you want physical property for yourself or do you want a property that will “appreciate” and give you returns? This is straightforward, just ensure documentation is done properly and rules are not circumvented during the purchasing period.

The last but not the least investment option is my personal favourite. Personal investments. Investing in education or technical skills brings returns that are not subject to volatility, government policy, or taxation. It cannot be taken away from you. Warren Buffet said, “Investing in yourself is the best way to find success”. When you hear people making 10x, 20x of their previous earnings, it’s because they have acquired knowledge or skills that have put them in a position to get higher income.

At the beginning of your investing journey, focus on increasing income and getting more money invested over ROI/Returns.

A 200% return on a N20,000 investment is N40,000.

A 10% return on a N2,000,000 investment is N200,000.

Perspective – The latter enables you to invest in less risky assets, while the former sends you hunting for risky and volatile assets.

Money is a by-product of becoming the best. The best way to make a lot of money is to become the best at what you do.

In conclusion, three important things:

  • Investing in all the above asset classes is possible using different allocation strategies in proportion to your risk appetite. Diversification and Risk management are two important pillars in investing.
  • The opportunity cost of holding cash is the cost that could be realized if money were invested instead of held. Someone gives you N50k? Toss it in one of your funds. That’s how you build a portfolio. Interest is the reward for parting away with liquidity.
  • Importantly, never give anyone money to “invest for you”. Contact a finance professional for advice and do it yourself.

This Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained on this site constitutes a solicitation, recommendation, endorsement, or offer by the author or any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.

Related Posts