How much financial risk can you take for more profit?

0
134
INVEST WISELY
INVEST WISELY

How much financial risk can you take for more profit?

How do you like your risk when you’re investing your money? In your quest for profit and returns, are you prepared to risk it all and take an, to quote the great philosopher Dino Melaye, ‘if I die, I die’ approach? Or is your approach to life one of, ‘if you can’t move me forward, just return me to where you found me’?

I recently reviewed a report by Investment One, an asset and investment firm in Nigeria, titled ‘Top 10: A 2018 report on 10 great places to invest in Nigeria’ and discussed it a bit with some friends [Disclosure: I was paid for the work]. The somewhat remarkable thing about the report is that the first 6 in the top 10 fall under the category of ‘fixed income’. These are types of investments that pay out income at predictable rates and at regular intervals. In short, bonds and treasury bills. In most countries, especially those that have their own currency, lending to the government is the safest investment decision you can make with practically no risks whatsoever. But where Nigeria differs from most other countries is that it is quite rewarding to lend to the government even though it is risk-free.

Last year, treasury bills – short term lending to the government for up to a year – were paying up to 22 percent interest. This year, they are paying around 15 percent, according to the Investment One report. You’ll be lucky to get a 5 percent return on risk free investments in other countries that Nigerians like to refer to as ‘saner climes’ and in very rich countries, you may need to pay the government to lend to them. In Nigeria this has implications because if the government that is completely risk-free is paying 15 percent to borrow money, who are you to get a lower rate than that? That is to say, whatever rate the government is borrowing money can be taken as the ‘zero’ point and everyone else can start counting from there.

Indeed, when you look at commercial papers (CP), the next best investment on the list, you see banks paying up to 22 percent to borrow for 9 months. If a bank borrows money at 22 percent, how much can it lend it out to make a profit after paying for diesel, the CEO’s Range Rover and staff salaries? Then you move on to state and government bonds paying 17 percent or more and corporate bonds also paying 17 percent. These all contrast nicely with Eurobonds which cost just under 9 percent for the Nigerian banks that have so far borrowed in foreign currency. You pay a lower interest rate but the foreign exchange risk belongs wholly to you. Who knows what might happen to the naira tomorrow?

As stated earlier, all the above investments are of the fixed income variety – there are hardly any major surprises with these types of investments except of course a company goes bankrupt or a country or state goes insolvent. If you buy a company’s bond with 17 percent interest on it and the company takes your money and invests in something that returns 300 percent, you cannot participate in that profit – all you get is the 17 percent you agreed to at the time you lent them the money. If you want access to profits in that manner, you have to invest in equities. Of course the flipside with equities is that if the company makes no profits, you get nothing. According to the Investment One report, equities delivered an impressive 42 percent return in 2017 yet they came 7th on their top 10 list.

What can we say about all of this? Does it mean Nigerians are risk averse and just want something that pays a fixed amount and don’t mind giving up potential extra income to get that? The answer is not so clear-cut but there might be something to it. We know that equities in general have bad years and good years but the key is to take a long term view because, more often than not, over time, you will make a decent return on them. Even when Nigerians seemingly take extravagant risks with their money like ‘investing’ in MMM, they do it in a ‘fixed income’ manner given that MMM promised a fixed monthly return.

Maybe for anything to make sense to the majority of Nigerians as an investment, it needs to come in the form of fixed income. If this is the case, there is a problem to be solved here because all the things Nigeria needs to do to make the country a better place involve taking a long term bet on the country – some will go well, others will not. But over time Nigeria will be better for it. In other words; less fixed income, more equities.

The report is available on Investment One’s website. Whatever you decide after reading it, make sure you start investing in your own future from today.

READ MORE

LEAVE A REPLY

Please enter your comment!
Please enter your name here