Investing in 2022: nine asset classes to consider: For a sizable section of humanity, the new year serves as an opportunity to reflect on the past year and to reiterate annual “new year resolutions.” “This year, I’m going to increase my investment,” “I’m going to take my finances seriously this year,” and “I’m going to make better decisions this year.” Your zone of contemplation, your period of sobriety. You’ve barely recovered from the December highs… or, as it’s generally known, Detty December. The month that feels like a night out with your friends, where excellent vibes and spirits urge you to spend an unplanned $1000 while casually forgetting that January is the longest month of the year, clocking in at 310 days… except that the last ‘0’ on the real calendar is largely invisible.
Retail investors frequently suffer from what we refer to as “analytical paralysis” – the inability to act due to excessive pondering. “How much capital am I able to invest?” Everyone has a challenge, but financial planning is rocket science.
The reality is that there are various investment options, but no one invests for the sake of investing; the objective is to maximize earnings, which is why it is so difficult. Profitability is to business what ROI is to investing. Thus, understanding the plethora of investment options accessible is the most difficult element, owing to the inherent risks connected with investing.
However, let us examine investment opportunities collaboratively.
Nota Beneficia: (x%) denotes year-to-date returns. Year to date (Y.T.D.) is a term that refers to the growth or decline in value of an asset between the beginning of the year and the current (present) date. This figure is critical because it enables you to determine how well your investment would have performed if you had invested at the beginning of the year.
For example, Bitcoin’s year-to-date value is (70.43 percent ). In January 2021, a N50,000 investment in Bitcoin will earn a total of N85,215 (Principal + Interest), Ceteris Paribus, at the time of writing (December 28th, 2021).
The average investor diversifies his or her holdings across asset classes. This article discusses nine of them, including stocks, indexes/ETFs, mutual funds, currencies, cryptocurrencies, commodities, and startups. It is completely up to you and your risk tolerance. Keep the golden rule in mind. The lower the risk, the greater the reward; the greater the risk, the greater the ‘probability’ of reward. Probability is the operative term.
When it comes to investing in stocks, this could include well-known US companies like Apple (39.35 percent), Tesla (49.90 percent), Facebook/Meta (28.72 percent), and vaccine manufacturer Moderna (137.3 percent); or Nigerian companies like Guinness (105.26 percent), Dangote Cement (5.35 percent), and bank stocks like GTB (-20 percent), Access Bank (4.73 percent), and FBN Holdings (137.3 percent) (60.84 percent ).
Individual companies, on the other hand, can be challenging for the average investor, which is where indexes/ETFs come in. ETFs (Exchange Traded Funds) are straightforward investment vehicles that pool the weightings of several stocks and, by tracking indexes, eliminate the stress associated with stock selection. The S&P 500 index (27.43 percent) is a popular index because it represents the stocks of the country’s top 500 companies, whereas the NASDAQ 100 index (22.45 percent) represents all of the country’s top technology companies. In Nigeria, we have the NGX 50 Index (0.07 percent), which implies that when you invest in an ETF that tracks the NGX 50 Index, you acquire ownership and performance of all index assets. The ETF invests in the top 50 companies on Nigeria’s exchange market in terms of market capitalization and liquidity.
Additionally, mutual funds such as the Stanbic IBTC Dollar Fund (SIDF) may be considered. This fund invests at least 70% of its assets in high-quality Eurobonds, up to 25% in short-term USD deposits, and up to 10% in USD equities. Cowrywise, an app, allows you to search for alternatives to various popular mutual funds, like the Nigerian Eurobond Fund (6.70 percent) and the United Capital Sukuk Fund (7.24 percent).
Others invest in currencies and benefit when one currency outperforms another — either through currency trading or cash conversion. For example, the US dollar strengthened against the pound sterling – US/GBP (1.78 percent), while the naira devalued against the dollar – NGN/USD – on the official market (-7.30 percent ).
Then there are cryptocurrencies, the new kid on the block that has altered the perspective of financial markets. Initially, the majority of people viewed cryptocurrencies as a giant bubble that would eventually burst, but the reality for the less greedy has proven to be quite different. Satoshi’s purpose with Bitcoin was to put money into the hands of the people, and cryptocurrency is well on its way to achieving that goal. The gatekeepers of traditional finance are watching the party next door and waiting for the crypto music to die down, but the tables do not appear to be shifting again — instead, people are shifting seats.
Individuals are investing in a variety of cryptocurrencies, including Bitcoin (70.43%), Ethereum (436.64%), Dogecoin (3098%), and Sandbox (17,036 percent). As you can see, the YTD returns are pretty substantial when compared to the preceding assets. However, substantial benefits come with a significant risk. The cryptocurrency market is extremely volatile, resulting in sleepless nights and compulsive checking of your Binance or Bybit apps, evoking the classic investing adage, “Invest only what you can afford to lose.” Dollar-cost averaging works best in volatile markets or when combined with a simple Buy and Hold strategy (lumpsum) — but what about market timing? Impossible.
With over 16,000 alternatives to Bitcoin, a limitless supply of cryptos with essentially identical qualities provides a false environment for the uninformed investor. Because a cryptocurrency may be created in less than ten minutes, it is vital to understand market capitalization metrics, use cases, whitepapers, and the importance of consulting a financial expert before making a decision.
I must add, though, that in investment management, we use a metric called the Sharpe Ratio to determine an investment’s return on investment relative to its risk. While Bitcoin has outperformed the S&P 500 YTD, it has underperformed on a risk-adjusted basis (Sharpe ratio), as its performance must significantly surpass its volatility (excess risk) to justify its inclusion in a portfolio. This is why the vast majority of major financial institutions, including as pension funds, refrain from investing in cryptocurrencies.
Commodities are another option for investors. Commodities did well in 2021, with Coffee (80%), Brent Oil (48%) and Copper (25%), all of which delivered positive year-to-date returns, while other Metals and Gold (-5%) failed – the ostensible inflation hedge underperforming in the most inflationary climate possible.
The chart below demonstrates the annual return on a N50,000 investment from January 1 to December 28, 2021.
Startups are another exciting option for new-age investors. A tartup is a young firm that is frequently in its infancy. It is an entrepreneurial venture that is typically started by 1-3 founders with the intention of capitalizing on a perceived market demand by developing a viable product, service, or platform.
While Nigeria, Africa, and the world as a whole have a few successful companies, there are an equal number of failed firms. The sobering reality is that roughly 90% of startups fail. 10% of start-ups fail within the first year. Startup failure rates appear to be consistent across industries. Between years two and five, startups are most likely to fail, with 70% falling into this category.
We learn about the flashy ones on social media only after they achieve unicorn status or raise Series D/E/F funding, at which point it is too late for the average investor to invest. This excitement makes startup financing so appealing that you find yourself on the hunt for the next great thing, the next Uber, or the next Flutterwave, when they are still in the incubation stage. However, the dearth of publicly available data from startups complicates the investment decision-making process; hence, ‘Due Diligence’ must be undertaken first and regulatory overreach avoided!
When it comes to real estate, there are two views to consider. Are you seeking for real property for yourself or for an investment that will “appreciate” and generate income for you? This is straightforward; simply ensure that all necessary documentation is completed and that no rules are broken during the purchasing process.
Finally, but by no means least, is my preferred investment method. Individual investments. Investing in education or technical skills produces predictable returns that are not subject to government policy or taxation. It is irrevocable. “The surest way to success is to invest in yourself,” Warren Buffet declared. When someone earns tenfold or twentyfold their previous earnings, it is because they have acquired information or abilities that have enabled them to earn more money.
Prioritize increasing income and the amount of money invested over ROI/Returns at the outset of your investment career.
A 200 percent return on a N20,000 investment equates to N40,000.
A 10% return on a two million naira investment is equivalent to N200,000.
The latter allows you to invest in less risky assets, whereas the former forces you to seek out more volatile and risky assets.
Money is an unintended consequence of excellence. The most successful strategy for accumulating wealth is to excel at what you do.
Three key points to summarize:
Investing in all of the aforementioned asset classes is possible using a range of various asset allocation approaches that vary according to your risk tolerance. Two key components of investment success are diversification and risk management.
The opportunity cost of cash holding is the cost of investing the money rather than holding it. Someone hands you N50,000? Make a mental note of it and place it in one of your accounts. This is how a portfolio is constructed. Interest is the payment made in exchange for liquid assets.
Notably, never send money to someone to “invest for you.” Instead, seek the advice of a financial professional or do it yourself.
This Content is provided for informational purposes only and is not intended to provide legal, tax, investment, financial, or other professional advice. Nothing on this site constitutes an offer or solicitation by the author or any third-party service provider to buy or sell stocks or other financial instruments in this or any other jurisdiction where such solicitation or offer would be prohibited under applicable securities laws.