Can the SMART acronym apply to Investing? I think we can apply the SMART ethos towards investing. Using SMART, let us explore a few concepts in investing.
Specific
It is only possible to invest with a specific plan or objective. Investing is need-specific; it seeks to link the financial goals of an individual or group of individuals with available assets, considering their risk appetite.
A good example would be if I have N1m but want to grow that principle to N10m for my retirement in 25 years. I have a specific goal, which is Capital Appreciation.
If I want to expose my capital to appreciation, I should be overweight in equities for the long term and not short-term money market instruments like T-bills. In summary, specific investment goals determine the type of asset classes to invest in
Measurable
Investing is the intended allocation of assets to meet a quantifiable return. The return must be measurable to determine if the intended objective was met.
There are two types of returns: Absolute and Relative returns. Absolute return is what the asset or commodity is returned over a specific period. For example, if I buy Apple for $100 and the price is $200 twelve months later, my absolute return is 100%.
There is also relative return, which is the difference between what my assets made and the return of the market or a similar index.
For example, if I made 100% on my Apple Stock but the return on an index like the Vanguard Information Technology EFT (VGT) returned 10% in the same 12 months, my relative return or Alpha is 90%.
When an investor seeks a higher than the market benchmark return, he is said to seek Alpha or a higher relative return.
Achievable
Can an investor determine a projected return on investment in advance? The simple answer is yes.
If an investor wants a specific return over Time, the investor can buy a fixed-income product that promises a fixed return on that investment. Fixed income, of course, means the income received by the investor is fixed.
Are these returns guaranteed? Well, it depends on the issue. Government-issued fixed-income securities are usually risk-free issuers as the government can monetize its debt, but no investment is 100% risk-free.
Achievable
Another question is how to judge the achievability of promised returns; for instance, if someone offers you a return of 10% a month, translating to 120% a year, is this achievable?
An excellent place to start answering this question is to determine the risk-free return in the market.
In Nigeria, a 12-month FGN bond will pay 10% to 12%; this, compared to 120%, shows a considerable expectation gap.
When you get such a massive gap between what is promised in returns and the risk-free rate, it is a cue to ask more profound and more pressing questions on how the vendor intends to achieve yields.
Timebound
In investment, Time is money. A financial concept called the Time Value of Money (TVM) means cash in hand today is worth more than cash tomorrow; why?
In the future, money will come under the influence of factors like inflation, affecting its purchasing power. TVM allows investors to compare two separate cash streams, employing quantitative methods, and select the best option.
Also, investing early is a massively powerful hack, allowing the capital to compound more times and generate a more significant return.
Good write up. However, using foreign stock and dollar for the analysis and explation makes the analysis of foreign related than local investment environment.