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Financial Literacy

Between saving, investing, speculating, trading & gambling

It is necessary to cultivate certain habits and avoid others that would affect our future income under economic uncertainties.

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Financial skills everyone should master (1), Financial decisions for 2020, Between saving, investing, speculating, trading & gambling

I recently listened to a track titled ‘money trees’ by one of my favourite rap artists – Kendrick Lamar on his “Good Kid Maad City” album and was blown away.

“We all have dreams of getting shaded under a money tree” but if wishes were horses, beggars would ride.

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Between saving, investing, speculating, trading & gambling

Enough of the metaphors and back to reality… Whilst money doesn’t grow on trees, it is necessary to cultivate certain habits and avoid others that would affect our future income under economic uncertainties.

Saving

Saving is basically setting aside money from what you earn for a future purchase or to safeguard oneself against emergencies. Ideally, savings is money that can be easily accessible with little or no risk.

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[READ MORE: Would you have invested in buying a plot of land in Abuja FCT in 1980?)

It is a basic and essential skill/habit because it helps create capital, which can fund productivity. An individual or society that spends more than what it earns or doesn’t save will eventually meet its Waterloo.

As political, economic and financial activities develop especially for worse, it becomes difficult to save, especially in an inflation ravaged economy.

A critical question to ask is what currency is ideal to save in considering the depreciation in value of currencies over time. Should one save in Naira, dollar or euros and what proportion is ideal?

investor, Steps to investing, Steps to developing a growth plan for your business, Breaking down the biggest misconceptions young people have about investing , Here’s how your business can grow revenue in tough conditions (PART 1), Here are ways to find the right investor for your business, How to build up your investment knowledge, This simple advice could help solve your investment challenges 

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Investing

When you have saved a considerable amount of money, the next action is to put it to productive use so more interest can be generated and ultimately wealth creation occurs over a period of time.

Patricia

Investment is simply the process of making your money work for you by allocating capital to a venture with hopes of security of principal and additional interest.

However, with investment comes risk and the possibility of loss of capital depending on what asset an individual invests in and economic conditions that prevail.

If the stock of a non-performing company is purchased, an investment thoroughly analyzed at inception can go bust, while enormous returns can be delivered if a company exceeds expectations.

Just like the fears earlier noted for savings in Nigeria, investing profitably may become harder, riskier and unlikely to work out for the greater good if currency inflation, taxation and regulation are turned up by the government who may try to intervene in the economy. My fears are that these issues will continue to rise in future.

READ MORE: Investing & Gambling: Differences and Where They Intersect

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Between saving, investing, speculating, trading & gambling

Speculation 

Speculation is the buying of an asset or financial instrument with the hope that the price will increase in future. It could also be the process of capitalizing on government-caused distortions in the markets.

While an investor is mainly concerned with the fundamental value of his asset, a speculator is only concerned with market price movements. For example, a speculator doesn’t really care if a company is performing well or not, he only cares about whether or not he can make a profit from trading a financial asset.

There are two types of speculators:

  • Bullish speculator: Expects prices of securities to rise, therefore positions himself.
  • Bearish speculator: Expects prices of securities to fall, therefore sells quickly aiming to make a profit so as to repurchase the security at a lower price at some point in future.

Speculators can help improve the welfare of an economy as they are willing to take on greater investment risk than the average investor especially in times of uncertainty. They also add liquidity to the markets.

However, through their activities, speculators can cause asset prices to be pushed beyond reasonable levels which can lead to economic bubbles and busts.

Between saving, investing, speculating, trading & gambling

Trading

A trader is a short term market player who sits in front of the computer screen trying to buy low and sell high all day often scalping for fractions just to make a gain.

There are certain perspectives trying to compare the activities of trading and gambling stating how similar they are.

[READ ALSO: Adopt these 9 traits, become a successful entrepreneur)

Gambling

The word gambling leaves a bad taste in people’s mouths as they often imagine greed and reckless spending.

To gamble means to play games of chance for money or to take risky action in the hope of a desired result (money or material gain).

Between saving, investing, speculating, trading & gambling

Similarities & Differences between trading and gambling

READ ALSO: SEC outlines derivatives market as major plan for 2020 

For example, trading will not be gambling if you’re a banker lending money to some agricultural businesses and decide to hedge the portfolio of loans with an interest rate derivative.

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Billionaire Watch

Want to be like Warren Buffet, Michael Phelps? Here are their secrets

The distinctiveness among Buffet, Dangote, Ovia, Phelps, Bolt, Musk, is not what they do, but how they do it and how often they do it.

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Warren Buffett

Michael Phelps won 22 Olympic medals (18 gold), how did he do it? Well, he trained and trained and trained, then he ate and ate and ate every day. He was also blessed with natural attributes i.e., he was tall.

So, wait, if I am tall and eat, and train, I can also win 18 gold medals? No! but stay with me.

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Warren Buffet likes to invest. He reads research reports, likes numbers and is always looking a discount deal on great stocks. Ok. So, if I am good with numbers, research buy great stocks I will become as rich as Warren Buffet? Well, maybe not as rich but you will earn more from your investments. The distinctiveness among Phelps, Bolt, Buffet, Musk, Dangote, and Ovia, is not what they do, but how they do it and how often they do it.

READ ALSO: Investing in Cryptocurrencies during this economic shutdown; here’s your need to know

Let’s look at an Olympic swimmer like Michael Phelps. When Michael was eight, he wrote out his goals; he wrote, “I would like to make the Olympics,” then listed his time goals for the various races i.e. breaststroke, freestyle etc. At the age of eight, this future Olympian had visualized his goals, written them down, and put a date for accomplishing them.

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When seeking to create a financial plan, it is impossible to achieve success without visualizing out a goal on paper. Imagine creating an investment plan without any idea of a retirement date or income or rates of return. It’s impossible without a clear road map to determine how much to save and invest for five years. During his teenage years, he trained “every single day, 365 days a year, Sundays, Christmas and Thanksgiving days included… and twice on his birthdays,” says his coach, Bob Bowman.

If an investor saved N1.00 every day for 5 years at 0%, that saver would have N1,826.00 What if those savings increased to N5.00 and were invested at just 5% annually? Then the savings pot will become N10,373.04. Yes, inflation will erode the value after 5 years, but applying a 13% inflation rate, the saver still has a real saving of N5,170.14.

READ MORE: Top 10 risks Nigerian businesses will face in 2020/2021 – Report 

So, the second lesson we take from Olympic champions is to start early, save, and then invest constantly. Micheal Phelps is a swimmer, a sport for endurance and speed. What do endurance athletes like swimmers and marathon runners eat? Food rich in carbohydrates; they need the carbs to fuel the massive amount of energy they expend during their sports. Phelps, for instance, for breakfast eats as many as 12,000 calories prior to his races. His breakfast consists of “three fried-egg sandwiches, three chocolate chip pancakes, a five-egg omelette, three sugar-coated slices of French toast, and a bowl of grits.”

What does a sprinter like Bolt eat? Not calories but lean protein, eggs, meat, fish, dairy. Protein allows muscles to recover and develop after sprinting, which causes minute damages to muscle fibres that can be easily converted to energy. So, two different Olympic champions, each multiple gold medal winners, but because of their different sports, they eat very differently to achieve a different objective.

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Similarly, in investing, each investor is different, bond investors have instruments that have 30-year durations as opposed to stock traders who may be looking to buy and flip a stock in hours. What is key is to invest according to a stated objective and risk profile.

Patricia

Where the investor has a longer endurance factor to risk, meaning the investor can accommodate volatility in his earning, that investor will be comfortable investing on equities. Equities are higher-risk investments and can lose all invested capital but can also gain 100%.

However, where the investor has a lower risk endurance, then the investor will fill his plate with lean risk asset classes like sovereign bonds which offer lower volatility to stock and deliver a fixed return, but suffer if interest rates rise.

Thus, our third lesson from the Olympians, the food each investor eats, is a function of his individual sport. Where the investors have lower risk, his asset allocation diet is different. Each investor must tailor his asset allocation to his objectives and investment goals.

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Investment Tips

Proxy Voting: Making Your Voice Heard Inspite of COVID-19

Proxy voting is a process where one person chooses another to represent him or her in casting a vote on his or her behalf.

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Proxy Voting: Making Your Voice Heard Inspite of COVID 19

One of the privileges of owning shares in a company is the ability to attend the shareholders’ meetings and vote on important issues about the company. In most cases, such issues touch on dividend declaration, election and/or reelection of directors, authorization to fix independent auditors’ remunerations, and the election of members of the audit committee, among others.

It has been observed that shareholders love to attend such annual general meetings in person for the pride of place it provides, as well as the social status it bequeaths to the attendees in addition to the souvenirs they receive during such meetings.

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Unfortunately, that era of a social event involving the physical gathering of shareholders seems to be going extinct, thanks to COVID-19.  However, in spite of the devastating effects of COVID-19, and the changes it is bringing to our social life, shareholders can still make their voices heard during non-physical shareholders’ or annual general meetings. This they can do using proxy votes.

What is Proxy Voting: Proxy voting is a process where one person chooses another to represent him or her in casting a vote on his or her behalf. Proxy voting has not been more important than in the present COVID-19 times. In reaction to the pandemic, proxy voting is being used in areas outside corporate governance. For example, the US House of Representatives is pushing for proxy voting as a means of getting things done in the house. In a proposal released by the House Speaker, Nancy Pelosi, US lawmakers would be allowed to cast votes for their colleagues who are not in the Capitol in person. That underscores the advantage and the increasing importance of proxy voting.

Nigerian Companies and Proxy Votes:  Proxy voting is not new in Nigeria, especially among Nigerian companies. Whether it has been effectively used or taken advantage of is another question. However, Nigeria’s Corporate Affairs Commission (CAC) has been proactive and forthright in its quest to ensure that companies in Nigeria and Nigerian shareholders alike, take advantage of the proxy voting process in keeping with the social distancing rules put in place by various governments to curb the menacing COVID-19. The CAC has therefore asked companies to take advantage of “S.230 CAMA on the use of proxies in holding their Annual General Meetings.”

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(READ MORE: IMF, World Bank to hold virtual meetings over Coronavirus epidemic)

In line with the availability of the proxy voting process as a way to give every shareholder a voice and the encouragement and enablement from the CAC, many companies in Nigeria are complying with the advice. A visit to the website of the Nigeria Stock Exchange indicates that all the 30 companies that notified the public about their annual general meetings via the Nigeria Stock Exchange, since April 1, 2020, included notices or indications of the need for proxy votes in such notifications. Many of them even included links to live-stream the events, for those who would like to participate online.

Proxy Voting: Making Your Voice Heard Inspite of COVID 19

Brace for Change: There is no doubt that COVID-19 has changed and will continue to change the way certain things are done. From the look of things, proxy voting may become the new normal in corporate governance and conduct of shareholders Annual General Meetings.

Shareholders, big and small, should start getting used to voting by proxy, especially those who have not been doing so in the past. It is only by so doing that you will make your voice heard, in the affairs of the company in which you have worked so hard to invest in.

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Patricia
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Coronavirus

COVID-19 reveals that many Nigerians have no emergency savings

The playout of events following the lockdowns resulting from the ongoing COVID 19 pandemic shows that Nigerians do not have emergency savings

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Though we are still grappling with the effects  of COVID-19, it may not be too early to begin to take stock and find out what we did well during the pandemic and what we should have done better.

Almost everyone’s radar has been on the ill-preparedness or lack of appropriate response by the government, with little or no time for an inward look at ourselves.

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The type of government we have in Nigeria should not have left anyone surprised at their response to the pandemic, especially when it came to the welfare of the populace. What do you expect from a government that is dysfunctional, at best?

With such government, it is time for Nigerians to begin to watch out for themselves and prepare for the unforeseen, like the times we are in currently. The playout of events following the lockdowns caused by the ongoing COVID-19 pandemic shows that Nigerians do not have emergency savings.

According to a recent publication from one of the national dailies, “Barely one month of a lockdown of Abuja, Lagos and Ogun state, millions of Nigerians had become stricken with hunger. Many could not bear an extension of the movement restrictions.” The ensuing protests were indicative of the fact that many Nigerians were living off their daily incomes with no savings to fall back on.

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High Poverty Level

Many may have asked how they could save without having funds, to begin with. Agreed, the level of poverty is high in Nigeria; however, people should know that having savings is not a luxury, but a necessity. It does not have to be large, but putting aside something, no matter how small on a regular basis goes a long way in times of emergency.

I have seen images of Nigerians who surprised themselves and others with how much they saved over time in their piggy banks. There is no hard and fast rule of how much one should have in emergency funds, but there seems to be an agreement among financial analysts and planners that having the equivalent of 6 months’ expenses in your emergency savings account is the ideal.

The author of the book “Richest Man in Babylon” stated it clearly that if you do not save, it means that you have paid everyone else but yourself.

How to Start Saving

Pay yourself first: In line with the instructions in “The Richest Man in Babylon,” when you receive your monthly salary or collect that sales proceed from your business, “pay yourself first” by saving at least 10% of your collections or salary. For the salary earner, set up a direct deposit account where the money would be taken out of your pay directly into a bank savings account. By so doing, you are forced to save.

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(READ MORE: If you experience these signs then know your salary is not enough)

Patricia

Cultivate the savings habit: Just as spontaneous buying is a habit, form the habit of saving. Do not see saving as putting aside the remnants (if any) after all your expenses. If that is your attitude to savings, then you fall into the group that pays everyone else but themselves.

One thing is certain; as long as you have the money, there will always be something that is going to demand that money from you.

 

Remind yourself to save: If you are a salary earner who does not want to set up a direct deposit from your paycheck or you are a businessman or woman of any means, you can set up a savings reminder around the time you receive your salary or around your peak business time.

One website that can help you with this is here. With this, you can send an email to yourself to be delivered around the time you expect to receive your pay or business income, reminding yourself to save. Just like you set an alarm on your mobile phone, you can do so with a reminder to save.

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Start Small ASAP: The Bible says that if you are not faithful with small things, how can you be faithful with larger things. You do not need millions to start saving, all you need is the will, the determination, and consistency. So, start small and start now, but be consistent.

Reduce your Expenses: As already noted, one of the reasons that people do not save is because their expenses keep increasing, even when income sources are shrinking. If you find yourself in that situation (and you surely will, at one point or the other), cut down on your expenses and make them fall in line with trends in your income. Avoid spontaneous, emotional and flamboyant buying. Buy out of need, not out of want.

(READ MORE: Between saving, investing, speculating, trading & gambling)

Why It Seems Difficult to Save: To a whole lot of people, it is difficult to save because they live in the now. This is what financial psychologists call scarcity of attention. This scarcity of attention stops people from seeing what is really important and makes them see the urgent current expenses they need to cover.

5 Money Mistakes You Might be Making, COVID 19 Shows that Many Nigerians have No Emergency Savings

One reason why it is difficult to save is that while the expenses keep rising (out of increased need and inflation), sources of income keep shrinking or stagnating. The good thing however, is that we have the option to shrink our expenses in line with shrinkages in our income, but often times, we do not choose to do that. That is where the inability to save starts from.

Conclusion: If there is any lesson, we learned from the sudden outbreak of COVID-19, it is and should be that emergencies happen, and efforts should be made to cushion the financial impact of such emergencies by preparing for them in advance through emergency savings.


 

Written by  Uchenna Ndimele uchenna@mutualfundsnigeria.com

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