In this guide, we walk you through the various types of investments to help you achieve your financial goals and how to pick the right investment type.
What this article is about:
1. The purpose of investing
2. How to build your investment strategy
3. Asset Classes (Types of Investments)
The community of Cowrywise ambassadors had an exclusive session on types of investments and building a successful investment strategy with Abdulrauf Aremu Bello; a reputable investment research analyst. Bello carefully dished out a fine blend of investment knowledge to the enthusiastic ambassadors, and we believe it is important to also share the lessons with you.
The Purpose of Investing: To Preserve Value
Developing a disciplined investment strategy is key to the process of wealth building, and investment is all about creating wealth by preserving and adding to the value of money. Money can be robbed of its value by inflation.
That many do not pay attention to inflation does not mean we are all not hurt by it. Ten years ago; purchasing a notebook with 80 leaves would have cost you just N80 but today it can cost as much as N200. Also, a sleek haircut which used to go for N150 costs at least N500 today. This shows that the essence of money is in its purchasing power and not in its absolute value.
Absolute value focuses on the face value of a currency and not the purchasing ability of the currency. A N1,000 note today is the same as N1,000 five years ago, but the purchasing ability of N1,000 has changed over the last five years.
Can Everyone Invest?
With the true value of money found in its purchasing power, which changes over time, and not in its absolute value, there is a need to let your savings lead to investing. To explain the importance of investing your savings, Bello gave a relatable example using a planned purchase for a Toyota Camry.
If one was committed to purchasing the vehicle which was worth N5 million three years ago, the person will be in search of an extra N3 million to N5 million at the moment because the savings did not appreciate in value over that period. With investments though, the funds would have appreciated.
He went on to acknowledge the fact that investing your savings can be tough, but nothing is ever too small to invest as all one needs is a little bit of discipline. Also, he clearly separated the act of investing from betting and Ponzi schemes.
Building your Investment Strategy
Your investment strategy is guided by your investment objective and risk profile. It is quite imperative that you understand what you are working towards and how you respond to risk before you dabble into investments. Risk profiles range from risk-loving to risk-averse, you can find out your risk profile here.
Types of Investments (Asset Classes)
An asset represents an arrangement that allows for the investment of your funds, to make them work for you and earn returns. Although all asset types come with a certain level of risk which requires risk management, Cowrywise takes away that burden. We manage the risks on your behalf without tampering with your returns. Bello limited the discussion to focus on financial assets which include shares, bonds, and commercial papers. This form of asset is the most liquid in nature.
Liquidity refers to the rate of an asset’s ability to be converted into hard cash.
Financial assets like any other product have their own markets. These are the Equities Market (EM) and Fixed Income Market (FIM). In the EM, shares are exchanged and returns are earned through dividend payments and capital appreciation.
Naturally, out of profits made, firms pay a part out to shareholders. Investors are consistently in search of undervalued shares that will appreciate over time. It takes skill to identify such shares, meaning that the returns are subject to change based on the performance of selected shares.
On the other hand, just as the name suggests, FIM products offer returns that are agreed upon before they are bought. Hence, they are described as more secure although their returns might not be as high as those of the EM.
In the FIM, we have two asset types of investment that stand out for their level of security; Treasury Bills (T-Bills) and Government Bonds. T-Bills are short-term loans to the Federal Government issued through the Central Bank of Nigeria while government bonds are purchased directly by the Federal Government and are long-term in nature with returns paid at regular intervals. They are both regarded as the safest investment type.
Despite the associated benefits of T-Bills and government bonds, purchasing them can be very expensive, limiting the number of people that can purchase them. For this reason, firms like Cowrywise exist to help people access such assets by pooling up funds and investing on their behalf towards their set investment objectives.
What is your investment objective and how are you working towards it? We want to hear from you.