Adaeze is a young, upwardly mobile professional, she is employed at a highly profitable company
which operates in the FMCG sector and earns a very good salary. Adaeze desires to invest a portion of her earnings in high growth investment assets that will generate substantial incomes for her when she is no longer able to work. Adaeze needs advice on how to allocate her investments in order to gain the best returns at the lowest risk.
There are a multitude of investments chasing relatively scarce resources, especially in these uncertain times. You can scarcely go anywhere without being assailed by an advertisement or a marketer trying to convince you to purchase one investment or the other and promising fantastic returns on investment.
Before you invest your hard earned money in a business, stock, real property or any other investment, it is essential that you ask yourself the following questions:
- How much does the investment really cost?
Many people look only at the cash cost of an investment when calculating the cost of the investment. However in determining the true cost of the investment, the prospective investor should in addition to the investment cost, consider the cost of maintaining that investment and other investment opportunities or experiences that they will have to forgo in order to purchase and maintain the investment asset.
For example, if I am going to purchase a piece of real estate at the cost of N1,500,000, I should consider how much it would cost me to fence the property and construct a structure on the property. I should also consider the forgone returns from other investment assets I could have purchased with the money I used to purchase and develop the real estate.
Consequently, if I have to invest a further N5.5 million to develop the real estate, as a result of which I lost potential returns of N20 million which I would have earned within the same time frame if I had invested the total sum of N7 million in another investment class such as blue chip stock. Consequently, the true cost of the investment is N27 million and not N1.5 million as many people would assume.
2 How much will the Investment really generate for me?
When investing, you should always ask yourself, what is the return on my investment and by what percentage would my investment returns appreciate over time?
If I invest the same sum of N1.5 million in 90-day treasury bills which pay an annual interest of 10%, I would at the end of one year receive approximately N1,500,000 +(N1,500,000 x 10% x 1) =N1,650,000.
However, if I invested the same amount in a Fixed deposit account paying 6% per annum, my earnings would be calculated as N1,500,000 +(N1,500,000 x 6% x 1)=N1,590,000.
When determining the value or desirability of an asset, it is helpful to look at the rate of return expected from the asset, and this will inform you of how much money you can make from the investment time within a certain time frame.
3. Are the Investment returns worth the risk?
The rule of thumb in respect of investment risk and return is that the higher the expected return from the investment, the higher the risk of loss from that investment. The rationale behind the high investment returns is to compensate the investor for the risk they are undertaking by investing in the asset.
No investment is without risk. Unfortunately, to build wealth over time, investors need to accept a significant amount of risk. Taking on very little risk by keeping the bulk of your money in a savings account practically guarantees you will lose purchasing power over the long term due to the rising costs of goods that you might buy with that money.
Spend some time to think about the risks of your investments. You may discover that your tolerance for risk is lower than you expected or that you’ll need to adjust to accepting more risk in order to meet your financial goals.
It is our hope that we have been able to clarify your investment questions. All questions may be forwarded to us at 08036258312 or by email at firstname.lastname@example.org. We encourage you to drop comments below.