Key highlights
- Following the COVID-19 pandemic, the stance of several economies and central banks around the world have led to a decrease in asset prices.
- In 2023, the continued hawkish stance of economies around the world suggests that interest rates may slow down, which may create an opportunity for market rebounds and short rallies in assets.
- Investors may consider dollar-cost averaging and investing in less risky assets like government bonds, treasury bills, and Eurobonds to mitigate risks and secure reasonable returns.
Following the COVID-19 pandemic in 2020, even the most mediocre of investors may have been tempted to see themselves as the next George Soros or Warren Buffett.
I mean, why not? An average Joe who, for example, heard about cryptocurrencies in a pub conversation or randomly found himself watching one of the ‘gurus’ on CNBC may have made handsome returns speculating on digital currencies and buying tech stocks. After all, Bitcoin had an incredible run of 144%.
In early January, the asset changed hands for around $28,204. And just 10 short months later, investors cashed in the asset for a whopping $68,990. Many thought they had finally found the ‘holy grail’. Some even quit their nine-to-five, sold their family inheritance, and plunged all of them into these assets. Why not? If I can double $100 in less than a year why not sell my properties and make more handsome returns?
At this rate, in a few short years, they will probably have a vacation home in the Maldives. Most of them at least have been left with their tails between their legs, in the worst-case scenario they may have lost almost everything by now.
What happened next?
Aren’t the prices of these assets supposed to keep soaring till every single investor owns a Lamborghini or two? Fast forward to 2023 and we may have an answer and probably a little insight on how to understand different economic climates and more profitably, how to speculate in them.
What is the difference between 2021 and 2023?
Well, we may go into so many economic technicalities and end up with a rather long article but the simple answer is the stance of several economies and central banks around the world.
Following the pandemic we saw several governments ease interest rates and give their citizens benefits and aid. All of these were probably in a bid to ease the sufferings caused by the pandemic.
While this may have been good from a humanitarian point of view but from the standpoint of an economist, there was a financial void.
All of a sudden people found themselves having “free money”, interest rates were reduced and companies borrowed.
For example, according to Brookings, in 2020, global government debt increased by 13 percentage points of GDP to a new record of 97 per cent of GDP.
Maybe this last episode of economic jargon may have been too much. In summary, it is highly unlikely to see a surge in assets when government policies discourage borrowing(high-interest rates, etc) and when there is uncertainty (war scenario like the Russian-Ukrainian war).
These macroeconomic conditions are like the puppet string controlling what happens to assets. But what do all of these have to do with investing in 2023?
Well, 2023 has seen a continued hawkish stance from economies around the world. Although interest rates may be slowing down, many investors and speculators expected a faster rebound.
In Nigeria unfortunately, interest rates haven’t slowed down. February for instance saw record-high interest rate numbers of 21.92%. All these may be signs of an imminent market rebound but as mere market speculators, it’s difficult to tell when.
So, what can I do in 2023 with my money?
With all these should I just keep my money in the bank or just get a giant piggy bank to keep my money?
Well despite the harsh economic climate it wouldn’t be out of the ordinary to see short rallies in assets. For example, Meta(formerly Facebook) stock prices are up about 54% this year alone.
So, despite what the fundamentals are saying speculators may still make some profits by buying stocks or assets that they believe are severely undervalued. The said Meta stock plunged more than 50% in 2022 so a recovery in early 2023 may have been expected. This is because just as assets are not expected to keep going higher so are they not expected to keep falling. Okay, I understand this but what is the catch? Do you mean I can now buy assets and expect to sell them later in the year for profits?
Honestly, investing in these kinds of conditions requires a little bit of everything. More knowledge of how the markets tick, more patience to wait for assets to plunge before buying, and more discipline to cut losses if and when losses become large. Most importantly conservative investors may consider investing more in less risky assets that don’t take so much hit when economic conditions are harsh. Traditionally assets like government bonds, treasury bills, and Eurobonds are considered safe and may provide reasonable returns. However, not many investors may want to lock their money in investments that typically return anywhere between 5-10% per annum.
Dollar-cost averaging
Typically there are two distinct strategies an investor can employ when investing in a particular asset. Lump sum investing and Dollar cost averaging. Lump sum investing is the act of investing all of your available money at once.
The amount of money being invested is not important, only that the entire amount is invested immediately. Dollar Cost Averaging (DCA on the other hand is the act of investing all of your available money over time.
You wait for the asset to go lower and buy at several intervals. In times of uncertainty, it is difficult to tell where assets will make lows(i.e the exact lowest price for a certain period) instead of smart investors buying at certain predetermined price levels. At the end of the day, they may buy at a better price overall compared to the investor who invested a lump sum.
In conclusion, 2023 may not be the picture-perfect year for investing as the harsh economic conditions may act as a clog in the wheel of impressive returns. However, if you are a skilled investor you may still take some financial bets albeit with lesser equity or capital at risk. For more conservative investors, you may consider investing in less risky assets like bonds. Finally, for highly trepid investors you may consider holding your money tight, didn’t they say “a bird at hand is worth two in the bush”?