Inflation and declining earnings are two major factors that affect investment.
With inflation, prices rise but salaries and income may not keep pace.
Because it costs more to buy less, money declines in value, or buying power. Inflation has a powerful impact on investors, since many otherwise attractive assets can be a bad choice.
Although there are no guarantees, investors in equities get better returns during inflation because equity is supposed to adjust to inflation, unlike fixed income investment in which the value of returns erode.
Inflation was 8.5 per cent in March this year, up from 8.4 per cent in February. It has maintained a steady rise over the past few months, and may continue as the impact of naira devaluation unfolds.
Analysts expect inflation to settle at about 8.7 per cent this year, all other things being equal. If it does, investment in certain instruments, particularly fixed income instruments like bonds and treasury bills, may be impacted.
Cowry Assets Managing Director and Chief Executive Officer, Johnson Chukwu, said people shun fixed income investments for those with high appreciation.
Fresh investment in fixed income tends to factor inflationary impact into the yield rates.
In other words, the percentage yield of every new investment in fixed income instrument is determined by the rate of inflation. But over time, when inflation outpaces percentage yield, the investment value depreciates.
Experts settle for stocks and other instruments that have historically performed well during inflation, including precious metals like gold; commodities like oil, copper, uranium and cocoa, which are all used worldwide.
“Buy stocks, particularly those that pay dividends. If a company’s costs go up, it can raise its prices to consumers, so inflation does not have to have such a big impact.
“Look for stocks that have a dividend greater than the 10-year treasury, and with room for capital appreciation,” said a financial expert.
Investors should consider TIPS; that is, Treasury Inflation-Protected Securities, since both the interest and the principal payments are indexed against the Consumer Price Index (CPI).
The principal increases with inflation, and decreases with deflation. Interest is paid twice a year, at a fixed rate, but since the principal increases with inflation, so does the interest.
When it matures, the investor is paid on the adjusted principal or the original amount, whichever is more.
It is important to diversify during inflation. Inflation brings with it risks and rewards, and if all investments are in one basket, it could be wiped out. Diversifying investment may lower fluctuations value. At worst, the investor can average out.
Collective Investment Scheme (CIS), Real Venture Capital (RVC), and Venture Capital (VC) investment products can also help balance portfolio effectively for average returns even during inflation.
Collective investment instruments, mutual funds, and real estate investment trusts are all assets of different types. Collective investment instruments enable investors to buy into a cocktail of investments, rather than buying each unit of the instrument.
Investment in mutual funds buys into several other shares of several other companies covered by the scheme.
“For instance, take a unit of mutual fund which unit is worth N1,000. That unit of mutual funds will have in its composition several shares of other companies.
“The benefit is that it reduces your risk, because when some of the shares are not doing well, some others will compensate,” Chukwu explained.
The benefit of mutual funds or collective investment instruments is that investors are able to moderate risks, and people who do not have the competence to manage their portfolio can come under a collective investment scheme.
“Also, it serves as a training ground for those who are going into investment for the first time.
“But beyond that, it reduces the risk of capital loss, because the component of a unit will not move in the same direction for all the investments in the basket; while some elements of the fund are moving up, others are moving down.
“But you certainly have moderate returns.”
Chukwu said for an individual to grow wealth or personal finance in the midst of declining earnings, he has to investment based on his risk profile – level of income, income available, and stage in life.
“We can advise you to be aggressive and invest in growth stocks if you are younger. If you are a more mature person, we can’t advice you to take risks, but can advise you to go for fixed income instruments.
“People who are of that stage dominate the fixed income instrument investment, because the risk of capital loss is minimal.
“But the basic thing we do is that we profile each customer, and we are in the most basic position to advise each on the most suitable type of investment to make, the level of risks to take, and how to moderate risks.”
