America is a nation of options. Take water for example, you can buy bottled water, water with mineral salts, water without salts, carbonated water, fruit-flavored water, or even water that is infused with oxygen. This example holds true when it comes to investing.
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You may walk into your financial adviser’s office with a clear idea of what you want to do. Let’s say you want to save for retirement, and then you are presented with options — do you want long-term investment options? Should you buy bonds? Okay… what kind of bond; interest-paying or non-interest paying? Inflation-indexed? Real Estate backed bonds? Convertible bond? 100-year bonds? The options are endless.
How would an American invest $100,000?
Let us start from a plain vanilla bank savings account. I got Fig 1 below from a J. P. Morgan Asset Management (JPMAM) presentation, and it tracks savings account return from 1994 to 2020. If that investor had put $100,000 into a savings account in 2000, those funds would have earned 6%. Today, however, those same funds put in the same account will only return 0.28% per annum. Keep in mind that inflation in the United States is currently at 0.3%. So, the investors are just barely hanging on in terms of earning a yield.
More questions to consider…
- What if the investor decides to earn a return that is higher than US inflation?
- How can the investor beat inflation?
- What about bonds?
Well, the US Treasury Bonds are quite safe. The US dollar is also very strong. Can a dollar bond beat inflation? The simple answer is no. Take the 10-year bond yield in Figure 2; the yield has fallen from a high of nearly 5.5% in 2007 to just about 0.74 in 2020. Bond yields move in the opposite direction as interest rates. So, as interest rates in the US fall, bond prices rise, thus yields fall.
Investing in bonds does get the US investor a real rate, but certainly no daylight. How else can the US investor boost his returns to real gains? Keep in mind this desire for yields will necessitate having to expose the portfolio to more volatility (risk). What about equities?
Investing in US equities
In 2020, the US stock market has been essentially flat, as Figure 3 shows. However, 2020 is an outlier and can be attributed to the economic malaise caused by the COVID-19 shutdown. The annualized return of the S&P 500 index between 1919 and 2019 is 10.47% (dividends included). So, whilst we cannot predict future earning, we can use the average returns as a guide.
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So, if that investor was looking at a fixed guaranteed return, with lower risk, the US Treasury Bonds will be the way to go. If, however, the investor wanted to take more risk and potentially grow his capital, investing in the capital market is the way to.
Figure 4. shows the relationship in terms of yield between both asset classes. From 1901 to 1958, the dividend yield earned on US equities exceeds that paid by US bonds. From 1959 to 2008 however, the dividend yield on US Government bonds surpassed that from Equities.
What is happening is simple —as stock prices rise, their dividend yield falls. This is because there is an inverse relationship between the two. Thus, in the earlier part of the century, bonds did not pay a lot in terms of coupons. Therefore, dividend yield from equities outperformed bonds. However, as America raised interest rates in the 1970s to combat inflation, bond yields rose and overtook stock yields. Fast-forward to the year 2007 when the Federal Reserve dropped rates to combat the global financial crises, equity yields again started to do better than bonds.
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The lesson from this analysis is clear, and that is the need for investors to know what exactly they seek: returns or yields. While stocks may have outperformed bonds by returns, bonds have beaten stocks in terms of yield earned.
In closing, the asset class with the best return in the US for the last decade has been Real Estate Investment Trusts (REITS).
Retail franchise investment next gold mine for Nigerian investors- CIG
Retail franchise investment curbs unemployment and create buffer for people looking for side hustle
The Choice International Group (CIG) has tasked both unemployed and employed Nigerians to embrace retail franchise investment, as the initiative would curb unemployment in the nation and create buffer for people looking for side hustle.
In line with a recent FBDS Study, there are over 450,000 Nigerian career professionals with minimum investible funds of N1 million, looking out for investment opportunities.
In the majority, these funds are looking for franchise type opportunities for ease of venturing and minimal failure risk.
As far as CIG chairperson, Diana Chen, is concerned, such investor should look no further but consider the group’s retail franchise investment opportunity, which offers Nigerian community mouth-watering offer of owning Gree & Lontor retail stores.
According to him, Gree is the world’s residential air-conditioner manufacturer, while Lontor provides high-quality, energy-saving and convenient rechargeable home appliances and lighting products for global consumers.
He said, “Both brands have been built by the CIG into a world-class electronic retail chain in Nigeria opening no less than 20 brand shops in Lagos and Oyo over the last 18 months.
“The sales performance of its existing stores in the country makes Gree & Lontor one of the most profitable businesses in Nigeria with yields of an average return on investment of 50% and above per annum.
“CIG is offering investors the opportunity to own any of six regional logistics centres, or any number of Gree & Lontor brand shops in viable locations across Nigeria.
“It is the decision of the company to open up these opportunities to the investing public through a Franchise Retail partnership.”
He added that the company has mapped out two investment models it says are simple, transparent, and hassle-free.
“The first model involves only six regional logistics centres located across the geopolitical zones in Nigeria.
“Whoever invests in this will require a capital outlay of $1 million, and become a mega distributor partner of the Gree & Lontor brand, and service a network of brand shops.
“The second investment model involves the Gree & Lontor brand shops – retail franchise stores that require an initial capital outlay of N20 million.
“The investor will secure a store size of 120-150sqm at any choice location, shopping mall, plazas, high streets and even residential neighbourhoods.”
What they are saying
Nigeria is a growth market for franchising and franchise development services.
Gbenga Ajayi, an Entrepreneurship analyst, said, “The retail industry comes second to the food industry among sectors with best franchising opportunities.
“As with other emerging markets, one of the challenges of franchising in Nigeria remains the strengthening of intellectual-property regimes so that franchise companies can transmit knowledge and franchise system concepts with the confidence that such know-how will be protected.
Where to invest N500,000 right now
Nairametrics interviewed financial experts on what assets they would invest in if they had N500, 000
Since a full economic recovery this year is off the table, Nairametrics interviewed some investment experts, entrepreneurs, and corporate heads, on the assets they would invest N500,000 in. The responses varied from buying gold to investing in mutual funds or starting a business.
The world economy is projected to fall by 4.4% in 2020, an upward guide from an earlier predicted rate of -4.9% made in June. The IMF projected that social distancing due to the COVID-19 pandemic will linger till 2021, but the transmission of the virus will plunge globally by the end of 2022.
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Temitope Busari, CFA
With fixed income yields at the current levels, my N500k in today’s market will go into a dividend-paying stock or alternative investments.
- Depending on whether or not I can afford to risk some capital and barring timing constraints, I would buy a stock that offers periodic cashflow in form of dividends.
- For alternative investments, I would explore high-yielding fixed deposits in the on-lending space.
Michael Nwakalor, Macroeconomist at CardinalStone Research
- The yields in the fixed income markets are currently on the low and producing negative real returns, the equities market provides a viable alternative to earn a total return above inflation.
- I like stocks in the banking sector, as a number of them remain undervalued by fundamental metrics. Several names are on the course to post near double-digit dividend returns by the year-end. A portfolio that includes the following counters – GUARANTY, STANBIC, ETI, FBNH, and ZENITH, should provide adequate exposure to the sector as well.
Adaobi Okonkwo, Currency Trader of a leading Tier 1 Bank
- With a few things to invest in, the most reliable investment that comes to mind is a mutual fund. The fixed income and money markets are currently experiencing a downturn; hence, investing in them could reduce my income spread.
- However, with a mutual fund, my portfolio of investment in the capital markets is determined by the fund managers with a decent return on investments certainly above the risk-free rate. Gold is a commodity that would yield a good ROI within a specified time frame if I wanted to invest by myself.
Silas OZOYA, President/CEO, SUBA Capital
Though quite a small capital, it might not do much if you want to play the long-term investment game. However, it can set the ball rolling.
- I would invest it in a high yield investment platform that pays at least 5% returns monthly to cover running costs.
- Put the money in a fixed deposit and leverage it as collateral to take a debt fund, with a 6 – 12 months moratorium from a commercial bank for a possible expansion of a profitable business. This way, you gain on the debt and still have your N500,000 intact.
Ugonna Thelma Ohiri-Anyanwu, CFA
With a gift of N500,000, my risk appetite and drive for higher returns,
- I would invest 50% of the funds (N250,000) on dollar and Eurobonds. This is mainly because of my future needs for FX and also as the need to hedge my currency risk.
- I would invest 25% of the balance (N125,000) in Ethereum, which would give me a steady cash flow with medium risk.
- The balance of N125,000 would be invested in Value company shares with low P/E and also stable dividend payments.
The overall investment portfolio allows for diversification, stable cash flow in both local and FX currency, and currency hedge. These would provide a solid mix between ownership of materially underpriced assets and high dividend-yielding assets.
Amid the rising COVID-19 caseloads prevailing globally, the financial experts interviewed above showed significant diversity on the assets they would invest in, coupled with their different appetite for taking risk reflected on their preferred choices made amid a blurry global economy era.
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