Nigeria is hurtling towards a recession. Some economists believe we’re already in one.
It’s the sort of time in which most people shy away from investing. The economy isn’t doing well anyway, so there’s a high chance you’ll lose money if you tried to acquire income bearing assets.
But is this the right approach to take?
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It could be. Or it might be short-sighted. It all depends on whether your idle money gains or loses value in such a period.
Why It Could Still Be a Good Idea to Invest During a Recession
If you’re dealing with a textbook case recession, you could keep most of your wealth as cash without worrying about losing real value. That’s because inflation usually slows down during regular recessions. But if you’re dealing with stagflation—a reduction in economic activity and rising market prices –then you should be concerned.
Nigeria could be struggling with the second situation. This means your money may still not be safe, even if you just kept it in the bank. Inflation could reduce its actual buying power at your local market.
So how should you protect your money from getting devalued?
Here’s what most experts say: keep some of it, and invest a portion if you can.
But how do you know if it’s right for you to invest? And how should you invest, given that there’s a higher risk of failing at it in these times?
In characteristic Nigerian style, we’ll be answering these questions with some questions of our own. They should help you make the right decision, especially during a recession.
Questions You Should Ask Before Investing
1. Do You Have Enough Emergency Savings?
Before you put your money in a stock or business, be sure that you have enough saved for everyday and emergency expenses.
Factor in possibilities like a fall in business’s profits, job loss, or other situations that might cause you to fall back on your savings. The rule of thumb is to shore up to at least three times your total monthly income. You may stretch that to five, just to be extra certain.
If you don’t have this much saved up already, or you can’t withdraw your investments quickly enough, you should probably leave your money in the bank.
2. Can you Bear Temporary Losses?
What if you’ve ticked the boxes we’ve just mentioned? What else should you consider?
Think about your risk appetite.
Are you able to absorb the shock of losing significant amounts of money, even if it’s a temporary loss? Do you have a high tolerance for risk, or would you steer clear from investments if there’s a big chance they’d fail?
Your answers to these questions could help you decide if you want to go ahead with investing. It also enables you to determine the kind of investments you should go for.
Here’s something to bear in mind: low-risk options are relatively safe, but yield low returns. Higher risk options can cost you a fortune if they fail, but they could equally give you bumper profits if they go well.
3. Will You Be in It for the Long Haul?
A lot of people want short term investments that provide generous returns. These sorts of investments are rare and often risky (if they are genuine). They are even riskier during economic downturns.
So it’s usually safer to stick with your portfolio assets for the long term. If they are good, their value will increase over time, even if they stagnate or fall in the short term.
You could still find short term opportunities and reap handsomely from them. But you could just as well lose with them too. You won’t win this way unless you’re a seasoned investor or a really lucky person.
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4. Have You Identified the Right Opportunities?
Even if you’re going long term with good businesses, how can you tell that they’re ‘good’ in the first place?
First, they should be companies or ventures with proven viability: profit-making, and running on a sustainable model. Make sure they don’t have a lot of debt. You should know how the business works, so you can tell whether it’s safe to put your money in it or not.
If you’re thinking about buying shares in a company, you can find useful tips in our article 6 Things to Consider Before Buying A Company’s Shares.
5. What’s Your Portfolio Mix?
It’s one thing to pick a good investment. But it’s quite another to assemble a good mix of investments.
Even in economic downturns, financial experts still advise that you diversify your assets. The reason is simple: a heterogeneous array of investments will lower your risk of losing money on the whole. If some types of assets lose value, other types of assets could gain enough to offset those losses.
For example, you have shares in an FMCG (Fast Moving Consumer Goods) company, and a bank. There’s bad news for the financial industry, and it leads to a fall in the value of shares in the bank. But there’s also a rise in demand for shares in the FMCG company, so its price rises. It’s possible that, on the average, the rise in the value of your FMCG shares will make up for the losses you incurred on the bank stocks.
Generally, it’s safe to stick with recession-proof investments. Go with businesses in FMCG (especially basic food items), and healthcare, for instance. Agriculture is a fairly safe bet as well; it was the best-performing sector during the last recession.
6. How Easily Can You Exit an Investment?
What if you want to pull out of an investment? How easy is it to cash out?
You should have an answer to this question before deciding to invest. While it’s right to hang on for the long term, it’s also smart to have assets you could easily liquidate. After all, a major emergency could crop up, and you’d have to attend to it quickly.
Conclusion
We tend to tighten our purse strings during recessions. And that’s understandable. But it’s not a bad idea to take advantage of the opportunities that may exist despite the troubled economy.
The questions we have asked here will help you weigh your investment options in such times, and make the right decision about them.
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