INVESTMENT GUIDELINE FOR 2009

You are welcome to 2009, I want to wish you a happy new year and my sincere prayer is that the Almighty God will see you through the year. During the course of the Christmas and New Year break I took time to reminisce on the events that took place in the financial markets in 2008. For example, all of us are aware that as far as the stock market is concerned 2008 was a year that you and I will not forget in a moment because it was dominated by the bears.

Dear friend, irrespective of all the challenges that we had witnessed in the capital market in 2008, it’s important for you to know that a new year has come. It’s time to get over the past and make new strategies for the challenges and opportunities that lie ahead which form the focal point of this article.

Stock market and general financial crises are recurrent phenomena in different generations, so it is inevitable. The most important thing is knowing what to do when we face financial challenges and that is why I want to congratulate you if you are reading this article because it will definitely open your eyes to common sense financial principles which a lot of us have broken and have paid seriously for.

HOW TO INVEST WHEN THE MARKET IS DOWN

1. Risk and Return: the forces of risk and return are two major factors you must put into consideration before investing your money in any venture this new year. Risk and return are twin brothers that are inseparable and in the financial world they have what we call a direct relationship, which means, the higher the return expected from an investment the higher the risk attached to it, also the lower the return expected from an investment, the lower the risk level will definitely be.

I want to appeal that you come to terms with these two major factors that will determine how successful you are financially in 2009, because investors who have ignored these forces, have had their fingers burnt and you reading this article might have been a culprit at one time or the other in the process of taking investment decisions.

I will explain these two major forces better by using the various classes of investments we have and how these two factors affect them. The classes of investments that yield the lowest return in Nigeria today include government bonds, treasury bills, fixed deposits and many other instruments that yield interests. As low as the return being generated from these instruments may seem, the level of risk attached to them is quite low; an investor who puts his money in any of these will, at least, be assured that he will get the principal invested back. Let’s take a look at the capital market that most of us are familiar with.

In Nigeria, the major instruments traded in the capital market are shares or stocks as some people call them. Shares are volatile financial instruments whose prices can go up or come down; they are not interest yielding instruments and are very different from the classes of investment earlier mentioned. At every time the prices of shares continue to go up or down, they are not meant to be static, and as a wise investor your major priority is knowing the factors behind these upward and downward gyrations so that you can take steps to safeguard your investment accordingly. But the painful observation I had made is that many investors who put their hard earned money in the stock market assume that stocks can only go up and not down, this is a wrong assumption.

The third dimension to viewing the forces of risk and return by a Nigerian investor is by considering the case of wonder banks like Sefteg, Wealth Solution and others. These wonder banks promised investors returns as high as 500 to 1000 per cent within a space of time. Most of these schemes did not stand the test of time because they have broken the same financial principle that I am sharing with you now. I actually found it funny when investors started complaining when these illegal fund managers folded up. My answer to the whole issue was very simple and I really need you to think about it very well: “If a scheme can promise the highest return within the shortest possible time, shouldn’t you be ready to face the music if all your funds are lost in the process, just because of that same financial law which states that the higher the return from an investment, the higher the risk will be.”

Dear readers, always take these two factors into consideration when it comes to investment and financial decisions you will be making in 2009 and years to come. They are basic laws in financial management that most investors often ignore but I want you to come to terms with them and apply them appropriately. I have shown you the weaknesses and strength of different forms of investment, in the next issue of this weekly, we will consider other financial principles that will guide how you invest in these trying times. Happy New Year!

Jide Ogunleye is a chartered accountant, and CEO, Denaro Capital Ltd.

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One Response

  1. […] INVESTMENT GUIDELINE FOR 2009 « Fortune&Class Magazine […]

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