Category: Investment

COVID 19 Lockdown and Personal Finances

In this time of economic slowdown, there is a need to look at new ways of managing our finances in line with the current economic realities. Many small business owners have their revenues compromised, and the incomes of the self-employed have been particularly decimated by this lockdown.

There is therefore a need to revisit our personal spending budgets. Budgets are derived from income, so if income has changed then the budgets must change. We may not be able to reduce the expenses on essentials; in fact, these may actually increase because of the need to stockpile supplies. However, our costs of feeding may reduce because we cook all our meals at home and have eliminated expensive restaurant/ takeaway foods. Entertainment costs for movies, partying and clubbing would reduce since we cannot go out. However, these would be replaced by the cost of WIFI in order to keep the family occupied as they stay indoors. As we stay at home, let us ensure we have adequate (not too much) cash for small purchases in the local markets and neighborhood kiosks that do not have POS machines.

We would need to rework our financial goals if our incomes have reduced or our short-term priorities have changed. Our mid-to-long term goals should remain the same, but the target dates of achievement may need to be extended.

This lockdown is presenting novel ways of generating income. Let us come up with creative ideas. Some people are holding online seminars aka webinars and charging a token fee. If you are a respected guru in your field, charging the bored and idle populace a meagre N5,000 to share your wisdom would be seen as an extremely generous offer. Payments are made upfront directly into your bank account and access to the webinar is granted only after payment. Each access is unique to each payment using a unique QR Code. If 100 people register for the webinar, you and your banker would be smiling. Other service providers like interior decorators, life coaches, Maths teachers etc. are selling their services online in unique ways. Some people are doing so well that they may not go back to their regular 9-to-5 jobs after the lockdown.

A few of us have loan repayment obligations which we may no longer be able to meet due to our reduced income. Do not ignore them and assume your creditor knows “what is going on in the country”. Be proactive. Engage your creditor and negotiate favorable loan rescheduling terms. The Federal Government and the Central Bank are already championing this, so rescheduling should be easier now than at other times.

How about our personal health and medical care? This pandemic brings to the fore the need to have adequate health insurance for the whole family. We may also need to buy other types of insurance. For instance, the self-employed could consider taking life insurance policies that pay them a salary when they are unable to work and earn an income. Please speak to an insurance broker on the various types of policies and the benefits of each type, so you would know the ones that suit your peculiar situation.

As we rework our budgets, revisit our financial goals or reschedule our loans, we must do so based on empirical facts. Do not rush to making hasty decisions under pressure or out of fear. Take the time (within reason) you need to calmly review the pros and cons. But avoid analysis paralysis – which in itself, is being immobilized by fear and refusing to make any decision at all. Refuse to be pressurized by your creditor. Stand back and appraise your options. Ask for help from 3rd parties if needed.

Some of us are using Personal Finance Management (PFM) Apps to manage our finances. These would be very useful at this time when we want to redo our budgets, reschedule our financial goals or rearrange our loan payment plans. Once we input our new income figures, the app would suggest ways of achieving these. This way, we are immediately presented with several options and can choose the best ones faster.

Some of us may need financial help and cash support. Please take advantage of the numerous platforms that are providing material and financial help. Everybody falls into rough patches at different times. Rough times are temporary. If we take the help being offered by the federal /state governments or NGOs, we would be able to keep our heads above the rough waters and escape quicker. Helping hands make burdens lighter. Please ask for and receive help. Stay home. Stay Safe. Happy Investing!

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Buying Equities During Bear Markets

Global stock markets are being battered by the Coronavirus effect as we speak. Many stocks are trading are far below their market value – that is they are a bargain. Now is the time to consider new investments in the equities because, certainly the prices would rebound. The only issue is – no one can accurately predict when they would rebound. But as we have said on many occasions – individuals should invest in the stock market on medium to long term basis and leave stock trading/ gambling to the professionals.

The market has cycles. There is the “bull run” and “bear market”. The bull run is when the entire stock market and most of the stocks on it are increasing in price and value. The bear market is the opposite. Every bull run is followed by a bear market and every bear market is followed by a bull run. It is the length of each one that determines the overall performance of the stock market at the end of the year. We should always expect these cycles, they are the way in which the market corrects itself. Investment experts advise us to enter when the market is down and leave when the market is up. But the current bear market is not market induced. It is artificially created by the COVID 19 pandemic.

The four most basic considerations in choosing shares are investment objectives, risk appetite, investment tenure and ethical considerations. All these must be carefully considered before investing. Investment objectives, especially at this time, would center on capital appreciation and portfolio growth. Risk appetites define how well we can tolerate the fluctuations that accompany share prices. If we are very risk averse, it’s best to avoid the stock market all together and choose investments that assure us of principal and profit e.g. money market investments and government treasury bills. However, if we invest in during a Bear Market, we have a greater chance of capital appreciation in the medium term. Warren Buffet, the most successful and richest stock investor and third richest man in the world advises a medium to long term tenure for each investment. When looking at ethical considerations we look at the businesses of the companies we want to invest in. Some may choose not to invest in alcohol and tobacco manufacturers, others would not invest in companies that manufacture using child labor in developing countries. These four factors help us to ensure we stay true to our financial goals and plans.

In choosing stock during a Bear Market we need to look at the price history of the stock. If the stock usually traded between N20 – N25 but is now priced at N15 without any serious problems occurring in the company, it is obvious it is suffering from coronavirus effect and there is value to be obtained in the medium term if we buy the stock at that low price.  Always do your due diligence and speak to your stockbroker for more insight. Buying during bear markets may seem contrary to conventional wisdom, especially because no one can tell if the prices would drop further before they begin to climb up again. Hence the need for a medium to long term investment horizon. When the market is down, share prices are generally low, as is currently playing out in many global stock markets – many good stocks are underpriced. That is the time to buy, one would buy at a bargain. To leave when the market is up is to sell when stock prices are generally high. That way one would make a good return on the investment and fulfill the stock market motto – buy low, sell high. Also, we may choose to keep the stock in our portfolio indefinitely and enjoy good returns via hefty dividend payouts.

It is important to point out, that there is a big difference between damaged stocks and damaged companies. Damaged stocks are stocks that have low prices, but the underlying companies are doing very well. Damaged companies are stocks whose prices are low because the underlying companies are failing. In a bear market, buy damaged stocks and not damaged companies.

The stock market is a major vehicle for wealth creation and income generation for most investors. Some investors have lost money but many more have been enriched by it. Empower yourself with relevant information, work with the right partners and do your due diligence before, during and after you commit your finances to equities or any investment asset for that matter. Happy investing.

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Plugging Leakages

As important as savings and prudence are, wealth only comes by active creation

 

I am certainly one of those who believe that we cannot get financially independent just by saving. As important as savings and prudence are, wealth only comes by active creation. We only get rich by increasing our incomes. However, savings are the precursor to investments. We can only invest funds we have accrued through savings. Therefore, as you read today’s article, please bear in mind that savings are not the end in themselves, but they are the means to the end. How then can we plug increase our savings? Where are the leakages that are draining our investible funds and consequently the growth of our wealth?

Subscriptions – they are the 21st century’s fad. Many subscribed to packages on social media platforms, cable TV and telecoms services. Take social media for instance, do we really need the premium package just so that we can be the first to read what is happening in the life of so-called celebrities? Most of the “hot” news becomes common and freely available knowledge within a few hours. It may not be worth the extra cost. Another drain is the cable TV subscription. How many of the 250 channels in the premium package do you watch in one month? Do you really need the extra view access if family members are not watching TV at the same time? Do you need premium cable TV and Netflix subscriptions together? What could the N18,000 paid for monthly premium subscription do to your investible funds? In addition to these two types of subscriptions, we have the undergirding one – data package. We use internet data subscriptions to access our social media accounts and Netflix subscriptions. If we review the usage of our data, we may discover that we spend more data on browsing to find the materials to watch, than on actually watching any material. We must determine ways to reduce the amount of data we use, and consequently the amount of money paid to internet service providers. We should utilise data saving mechanisms and curb the amount of data available for use by different applications. We must also regularly change our MIFI/ WIFI passwords and use strong alphanumeric passwords.  Some people have discovered that their neighbours use their WIFI without permission, having hacked into their accounts because the passwords were easy to decipher and remain unchanged for months.

Entertainment – Saying no to entertainment expenses requires financial discipline but thank God that the lockdown has helped us unintentionally. Do we really want to go back to the days of buying aso-ebi every month? Buying and sewing, then women add the cost of gele tying and professional make-up. Assuming the aso-ebi is ankara, if we spend N15,000 on one occasion every month, that is N180,000 investible funds drained from our wealth every year. Even without calculating the potential incomes, that is a sizable amount of money lost. Better to give it to charity and improve the socioeconomic environment we live and work in. Eating out is another drain that we can plug. Make cooking a fun event for the whole family. When the social distancing rules are relaxed, invite friends to eat in your house instead of taking them to restaurants. Pack snacks, school lunches etc, from home. Home packed meals offer better quality and quantity than the mass-produced ones. Study the situation for a month; see if there are significant financial savings from home-packed meals and take a decision on plugging the leakage.

Unplanned spontaneous spending is a leakage we must learn to plug consistently. Avoid spending money on anything that you did not budget ahead, except of course medical emergencies and disaster recovery items/ services. Never give in to pressure to spend. Ask for time to think about the purchase. Walk away from all the physical stimuli that are bombarding your senses and attacking your willpower. Walk away! Help yourself by preparing a shopping list every time you visit the mall or market. Do not take all your ATM Cards with you. Leave your phone in the car, to avoid USSD transfers. Many times,after walking away from the situation that is pushing the unplanned buying an item, we realise and conclude that the purchase is unnecessary. If it is still necessary after 24 hours, plan its purchase in subsequent budgets. Delayed gratification is a virtue that everyone serious about financial independence must master. It would help you keep your investible funds intact.

Wealth grows through increasing incomes, while income is generated through investing savings. Let us accrue all the funds garnered from the leakages and invest them in high yielding assets. Happy investing.

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Buying Adequate Insurance

One of the lessons to be learnt from the Coronavirus pandemic is the need to have adequate insurance cover. Insurance plans bring little return on investment, so we do not recommend them as optimal investment assets. However, they are essential for the protection of our wealth. Without insurance, we would need to liquidate assets to meet financial emergencies, but with insurance, our assets are preserved because the insurer pays for the emergencies. Apart from the more obvious coverage for life and health, there is now a need to consider other types of insurance protection against the emerging perils we are facing currently. Some of these additional protections may be in form of add-ons to existing policies.

Let us look at the typical life insurance policy. The policy holder contributes the premium for the stipulated time; if he outlives the contribution period, he collects the benefits, if he does not, his beneficiaries collect the benefits. But life policies now have many varieties which should be included in order to cover all the likely perils a person could face. There is the Unemployment Clause – in this instance, the Insurer would not penalize the policy holder if he is unable to pay his premium due to unemployment. In some policies, the insurer would continue to treat the policy as if premium is up to date. In other cases, the insurer pays the policy holder a monthly stipend for a stipulated period or even until he is able to find work again. Disability Clause, in this case, the insurer pays the policy holder a monthly stipend if he becomes disabled and is unable to work during the contribution phase of the policy.

Some of us have Group Life Insurance policies, which we were automatically registered for by our employer when we resumed working for the organization. For this policy, the next-of-kin registered with the HR department is automatically made the beneficiary. Some of us started working when we were single and unmarried. Have we updated our next-of-kin? Should your beneficiary continue to be your younger brother, when you now have a wife and three teenage children? Let us ensure our records are up to date both with our employer and our insurers.

Health Insurance – Some of us are blessed with jobs that provide healthcare for us and our dependents. For others, there is a need to make adequate provision for our healthcare. With the introduction of the National Health Insurance Scheme, came the Health Management Organisations HMOs. These have introduced different healthcare plans with value-added services. From as low as N3,500 per month, comprehensive healthcare can be provided for a family.

There are HMOs that provide telemedicine services that allow clients to receive medical consultations from doctors in the comfort of their homes via their mobile phones. This removes the stress of going to the hospital and waiting to be attended to. With the COVID !9 pandemic lock-down that restricts movement and also the very real risk of being infected if you go to a hospital, getting a Health Insurance policy with a telemedicine facility has become necessary.

With the easy payment models and creative value-added services, we have no reason not to provide comprehensive healthcare for our families. However, we must be careful to read what our policies cover choose the policy that meets all your family’s needs, so you are not left looking for money when medical emergencies occur.

No one can foresee untimely death but preparing adequately for dependents takes away some of the pain associated with the loss of a breadwinner. An education plan can help ensure that children get the level and the quality of education they would have received if both parents were alive. Education plans are available from investment firms, trust companies and insurance providers. A plan from an insurance company has the added benefit of full payment in the event the parent dies before contribution to the plan is complete. However, non-insurance companies have started adding that clause to their education plans. Ensure you read the fine prints to confirm that you are getting what you are paying for.

SMEs need to look at bespoke policies or add-ons that protect their businesses from today’s perils – business interruption, force majeures, supply chain failures, market failures, professional liability, workers compensation and others.

Finally, we must exercise due diligence in selecting our Insurer.And because these policies are long term (over 25 years for life policies), fresh due diligence exercises must be done periodically afterwards to confirm that the Insurer remains financially capable to protect our lives, our dependents and our wealth.

Happy Investing.

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Alternative Investment Options

In view of the low interest rate regime and the current negative growth in the stock market, it is necessary to explore alternative investment options. Investing in profitable businesses managed by competent people is one of the most profitable ways of investing and generating additional streams of income.

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Basics of Portfolio Diversification

We observed that the simplest way of hedging is obeying the common maxim – do not put all your eggs in one basket.  This is done via portfolio diversification. How do we diversify our investment portfolio without spreading ourselves too thin?

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