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Do you want to achieve financial freedom? If yes, then you need to know how to make wise investment decisions in both bull and bear markets.
These terms are usually used when discussing the stock market. But they also apply to other tradable assets, such as currencies, commodities, real estate, and bonds. They describe the general conditions of a market and the sentiments, actions and attitudes of investors.
Bull and bear markets tally with the four phases of an economic cycle: expansion, peak, contraction and trough.
Bull versus Bear markets
A bull market is characterised by aggressive economic growth, rising stock prices, and high investor confidence. An upward market trend reflects the way a bull thrusts its horns up into the air when it attacks an opponent.
Also, a bull can be seen as an investor who is optimistic that an industry is poised to witness growth. He attempts to make a profit by purchasing securities and selling them as prices rise higher.
Bear market, on the other hand, is the direct opposite of bull market. There’s a decline in market prices and many investors try to sell off their securities before it depreciates any further. It often implies economic downturn, inflation, and rising unemployment figures. The name is derived from the way a bear swipes its paw downward at an opponent.
A bear is an investor who believes that the market is going to adopt a downward trend and attempts to profit from it with various techniques, such as short selling.
How to make the most of your investments in a Bear market
Typically, most investors buy securities when prices are rising, and sell before it comes crashing down. But the problem is you may not be able to correctly predict when there could likely be a change in market trends, especially as speculation and psychology play a large role in it. So the big question is: what can you do to avoid losing money?
Most successful investors go along with Rule #1 investing, which Warren Buffet has been known to apply in his dealings. Rule #1 investors act contrary to the public, i.e. they buy in a bearish market, when there is a lot of fear and pessimism, and sell in a bullish market when people are rushing to buy.
The reason this strategy works is you spend less on a purchase, since prices are at an all-time low, and make a lot of profit when they begin to rise. You may ask “what if prices continue to fall?” in that case you can purchase more equity and earn even more profit when the value starts soaring.
To apply this strategy correctly, be sure you follow these tips:
- Diversify your investment: You wouldn’t want to put all your eggs in one basket. Don’t invest too much on a single stock. The best idea is to invest in various big brands known to survive hard economic times. In the case of real estate, you spread you investment across several low cost assets.
- Invest in small proportions, don’t buy all at once: Stage your buys and work your orders to get the best price over time. You want to be able to maximise your profit and reduce your losses by investing in small portions. It is not advisable to buy or sell all at once.
- Do in-depth research: Conduct proper research on all aspects of a company before you buy stock. Buy those that can never be out of demand.
- Stay flexible: Businesses are dynamic, which means that you have to plan for and recognize unexpected shifts in the market.
As a smart investor, you want to take advantage of both Bull and Bear markets. This can be done by finding quality stocks at low prices in bear markets, and selling them when they’ve regained value in bull markets. This strategy is long term and requires you make the right purchase decisions and most of all, that you are able to control your emotions.
Treasury Bills on the other hand is also a short term financial investment but sold by the Central Bank of Nigeria. An investor in treasury bills lends money to the CBN for a stipulated period in exchange for interest. Treasury bills are usually for a period of 91days, 182 days and 364 days. Treasury Bills have the following Characteristics
- Treasury Bills are sold bi-weekly or as determined by the CBN
- The CBN puts a limit to the amount of treasury bills it wishes to sell
- The CBN uses the funds from Treasury Bills to control money supply in the economy
- Interest rates for treasury bills are determined by an auction and can vary from investor to investor, amount to amount and tenor to tenor
- Interest on treasury bills are paid upfront
- The CBN pays an investor in treasury bills upon maturity and does not roll-over
- Treasury Bills can only be bought or resold at the Over The Counter Market (OTC)
- An investor who can’t wait till maturity to cash out on the treasury bill can sell his investment at the OTC market
- Treasury Bills are tax free
- Treasury Bills is not secured by any asset but are backed by the full faith and credit of the Nigerian Government
- Treasury bills can be used as a collateral and is accepted by all banks
Recently, one of the readers of my articles asked to know what investment options are open to salary earners. A salaried individual is like everyone else except that he or she has a fixed monthly income. This implies that their investments and expenses have to be managed strictly according to their fixed monthly income.
Since salary is assumed to be the only source of income for the salaried, it is advisable that such an individual fortify himself financially before investing so that adverse investment performance will not have untold effect on him and his family. Therefore, if you are a salaried prospective investor, you need to:
Get life insurance
Most families in Nigeria are single income families so much such that if anything bad happens to the income earner, the family gets shattered, at least financially. Again, given the risks inherent in capital market investments, it is only prudent to have a life insurance as a first step in one’s investment journey. It is very baffling to see many investors very deep into the market, yet they do not have life insurance.
Life insurance is and should be a basic part of any financial plan. Life insurance is a protection for loved ones against financial hardship arising from the death of a breadwinner. This is even more important today than ever before with high cost of funeral expenses, college education and medical bills. So, the first investment option for a salaried individual is to get a life insurance.
Prepare for financial emergencies
Life is full of surprises, emergencies do happen, jobs are lost without notices, and even good investment opportunities emerge sometimes suddenly. There is, therefore, the need for a cash reserve to help weather the financial storms and emergencies when they come calling.
Cash reserves do not only provide for emergencies, they also help to ensure that investments are not liquidated prematurely or at inopportune times to cover unexpected expenses. There are no hard and fast rules on what the exact amount of the required cash reserve should be, but most financial experts and planners will advise that an amount that equals about six months of living expenses be set aside.
So, as a salaried person, your next investment should be to have a cash reserve. A cash reserve should not necessarily be in a savings account or under the mattress; it could be in an interest-bearing money market account, money market mutual funds with low to zero luck-up period or another form of very liquid investment that is readily convertible to cash without loss of value.
Know your risk appetite
As a salaried and fixed income individual, your risk appetite is most likely going to be low as well as your risk tolerance, although your extended family profile could change all that. You need to know or understand your risk tolerance before you engage in any capital market investment.
Your risk tolerance will and should drive the type of investments you go into. Your risk tolerance depends on your psychological makeup, your current insurance coverage, presence or absence of cash reserve, family situation, and your age among others.
Talking about family situation, it is reasonable to think that a married individual whose children are still in school will be more risk averse than an unmarried person. On the other hand, older people have shorter investment time horizon within which to make up for any losses. the reason for this is because the older you get the less time you have to work to recoup on losses.
In that case the risk tolerance of an older man will be less than those for younger folks. Again, the more cash reserve and insurance coverage you have, the more your propensity to take risk. Now having known your risk tolerance based on the underlying factors, you can then define your investment objectives
Set your Investment objectives/goals
Having met those essentials above, you are now ready for a serious investment plan or program. A good investment plan starts with investment objectives. Investment objectives are the force that determines what you invest in. Investment objectives range from capital preservation, to capital appreciation and constant income generation.
Capital preservation as an investment objective implies that you, the investor, aim at minimising the risk of loss by maintaining the purchasing power of your investment. So, if you are risk averse or you will need money from your investment soon for children’s education or for building a house or you are nearing retirement, this should be your objective.
Investors whose aims are to see their investment portfolios increase in real terms over a period of time are better suited for capital appreciation as an objective. This is better for investors that are more risk tolerant and those with more potential to recoup on losses along the way.
If you are already retired or nearing retirement, and therefore depend on your retirement plan supplemented by investment income, you need an investment that generates income rather than capital gains. In that case, your investment objective should be current income generation. It is always good to have investment goals stated in terms of risk and returns.
Decide on asset allocation
Armed with the knowledge of your risk appetite and investment objective, you are now ready to decide on what to invest in, and how much to invest in any asset class. This takes you to asset allocation decisions. Asset allocation involves dividing an investment portfolio among different asset classes based on an investor’s financial requirements, investment objectives and risk tolerance.
A right mix of asset classes in a portfolio provides an investor with the highest probability of meeting his/her investment objectives. Asset allocation is the most important investment decision an investor can make in a portfolio because it demonstrates an investor’s understanding of his or her risk preferences and return expectations.
It is good to strive for a diversified portfolio. Unfortunately, the Nigerian market does not provide a lot of asset classes for optimal diversification, but diversification can be achieved across sectors or industries within the few asset classes in the Nigerian stock market.
Decide on how to invest
There are different ways to invest in the capital market. You can invest directly by making the stock selections by yourself, thanks to the online stock trading platforms that abound the world over. This implies that you have what it takes to conduct the required research and analysis of the companies whose shares or stocks you wish to buy.
It also implies that you have what it takes to know when to sell or add to existing positions. Another method is to have someone “do the heavy lifting” for you. In this case, that someone, often times called fund manager or portfolio manager, does the research and analysis and selects shares that suit your investment preferences, investment objectives, risk tolerance and appetite as well as your investment time horizon.
This route is most suitable for investors that lack the knowledge and time for the required research and analysis. If you decide to go this route, mutual funds are the best bet for you.
An investment can be seen as money spent on capital goods and services which in turn yields profit over time. A house is a physical structure that is usually built for the purpose of providing comfort and shelter. In Nigeria, getting a house built is a herculean task that could take years to complete. Some, who are not that lucky, end up abandoning the building project. This may sound strange, but it is a fact that a housing property is not an investment. On the surface, it may seem to be one, but under close scrutiny, one will discover that it is not.
Let’s look at the various reasons for this fact.
A building loses value with time; this is known as depreciation. Same cannot be said for the land on which it is built. The depreciation is a result of the effects of age (wear and tear) on the structure. For example, a house built in the 80s can no longer retain the same value it had during construction.
Remember, there is what we call time value of money. If you built the house with the sum of N1.2 million then, that same house may be valued at say N4million now, but considering the value of money then, it should have been much higher.
What it means is that the house has depreciated in value due to the passage of time. The value of the naira has depreciated by more than 150% over the years. Moreover, if you sell your old house today, your selling point is the plot on which the house is built and not the actual building itself.
If you live in your own house presently, it will at best help you conserve some money due to the fact that you won’t be paying rent anymore. Though the cost of acquiring a house has comparative advantage over payment of rent, it does not mean that the house is a source of income generation.
The truth is: it will take quite a couple of years for the total sum of money used in building a house to be recouped, and that by that time, the house must have depreciated in value. Considering that most of the rent collected in the house is used in maintenance and servicing loans acquired for building it, the house will not be termed as an income generator.
Input Recovery is Impossible
Unless you wish to sell off your house within a 10 year window, you will not be able to recover your input as long as you are the one living in it. This can be attributed to two major factors:
- Depreciation of structure
- Fall in the purchasing power of the currency (especially in Nigeria)
If you consider the twin issues of depreciating structure and fall in purchasing power of the naira, it will be very evident that houses built for self-purpose rather than for rent or business cannot be said to be an investment platform. They are simply for comfort or pleasure rather than a means of creating wealth over time.
One must not confuse investment and asset at this point in time. The land, on which the structure is built, is an asset, which appreciates over time, while the building can also be regarded as an asset, because it can be used in accessing loan facilities. Unfortunately, when it comes to the issue of investments, a house you built for the sole purpose of accommodating your family cannot be regarded as an investment.
Since the structure is not on rent, you will not recover the money you have used in building the house. Such money is classified under consumption and not investment. It is only in real estate, that money spent in erecting a structure is classified as an investment or input. The money spent in building industrial structures like banking houses, store houses, warehouses, hospitals and restaurants can be classified under capital investment, because when they begin operations, they are able to recover the total costs of erecting such structures.
There is a whole lot of difference between these 2 types of structures – one is for personal use, while the other is for business purposes. The former is not an investment, while the latter is an investment that usually yields dividend over time depending on the nature of business it is being deployed for.
Impact of location on value of a house
The actual value of a house can be impacted negatively or positively depending on the location and type of land where the house is built upon. A house built on a water logged land that is located in the remote part of a town can never be termed as an investment; this is due to the negative impact such environmental factors will have on the face value of the house.
A house that is built on an erosion-prone area also has similar drawbacks and it is difficult to place such houses under the categories of investment portfolio. So many houses built in erosion-prone and flood-prone areas have been abandoned due to the deteriorating states of the houses which have become a hazard in itself and the safety of such individuals can no longer be guaranteed.
There have been numerous cases of houses that collapsed due to the negative impact of the land on which such houses were built and the location of such houses. In such cases, the houses cannot be termed as investments due to losses incurred.
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A Mutual Fund is a Trust or Company that pools money from many investors and invests in a specified class of securities such as stocks, bonds, real estate or a balanced mix of asset classes.
Lead Asset Management Fixed Income Monthly Report – May 2019
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Lead Asset Management Fixed Income Monthly Report – April 2019
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