Investing is the act of seeking value at least sufficient to justify the amount paid. Consciously paying more in the hope that it can soon be sold for a still higher price should be labeled as speculation- Warren Buffet
Investing is an act of faith, a willingness to postpone present consumption and save for the future. We entrust our capital to corporate stewards in the faith- at least with the hope that their effort will generate high rates of return on our investment- John C. Bogle
What is wealth management?
Wealth management is the most advanced form of financial planning services. Wealth managers typically create tailored investment strategies and plan to help their clients manage their assets.
In the strictest definition, wealth management is for high net-worth individuals (>$1M). Think about wealth managers as surgeons and financial planners as your family doctors/general practitioners.
Wealth management involves more specialized tax planning, wealth growth, and protection, and estate and succession planning Financial planning includes- income, income-tax, insurance and health, investment and wealth, retirement, and estate planning.
The Economics of Wealth Creation and Management- What are the odds? -Inflation & Exchange Rate
Value erosion is at the heart of poverty in Nigeria:
- Win that battle, and you increase your chances of financial success.
Inflation in Nigeria averaged 11.93% between 2010 and 2020, for a cumulative 131.23%, and compounded at 245%.
- Your investment in 2010, needs to grow by 245% to break even in 2020. If you invested N100,000 in 2010, you need to have N345,000 by 2020, otherwise, you’ve lost money. That doesn’t account for the risk taken on the investment.
At the end of 2020, Naira was worth just 39% of its value in 2010 relative to the USD.
During this reference period, the NSE-ASI returned 64%.
- That means your N100,000 invested in the NSE-ASI in 2010 will be worth N164,000 at the end of 2020- that’s 47.5% of the amount needed to break even.
Improving the odds- Life cycle and financial planning
Life cycle-
- Phase 1: 0-20 – Birth & Education ( most already work part-time by 16)
- Phase 2: 21-60 – Earning Years
- Phase 3: >60 – Retirement (life expectancy about 80 years)
Ideal Life cycle- Nigeria (Adjusted for life expectancy)
- Phase 1: 0-20 – Birth & Education
- Phase 2: 21-56 – Earning Years ( Life expectancy 56 years)
Financial Planning
- Develop well-defined goals
- Divide the goals into short and long term
- Analyze current income, expenses, and savings
- Map out well-defined strategies to turn the goals into reality Review periodically, rinse and repeat.
Steps in Financial Planning
- Identify the investment objectives
- Needs and requirements of the investment objectives
- Determine the required returns to meet the financial objectives Determine your individual risk tolerance
- Design an asset allocation to meet the risk tolerance and returns Modify asset allocation based on any change in needs or risk tolerance
Opportunity and Risk Identification- Research your Investment
- Examine historical trends
- Perform financial analysis
- Compare with the peer group
- Obtain relevant economic news- identify emerging risks
- Forecast future performance
- View expert recommendations
Opportunity and Risk Identification- Sector Selection
- Fastest growing- identifies emerging trends
- Largest sectors- indicator for established industries
- Resilient sectors- exhibit the least variation in growth rate, safest to invest
- Tactical opportunities- every season presents unique opportunities, be ready to take advantage
Navigating tougher times-What are the emerging risks?
Global conditions- head or tailwind
Domestic conditions-
- Policy
- Activity
- Cost
- Financial markets
- Socioeconomic developments
Conclusion- Do’s and Don’ts of Investing
- Do stay informed of your investments
- Do understand the advice of experts before taking it
- Do invest long-term- it’s a marathon, not a sprint
- Do compound your investments, if possible invest a fixed sum monthly
- Don’t buy what you do not understand
- Don’t panic, you don’t lose till you sell