The answer is not the investment option that pays more but the assets whose returns match your investment objective and risk profile
Do not invest in an asset based solely on the return that the asset promises to deliver. Instead, invest in assets whose return matches your investment objectives
Your objectives are limited to three
- Capital Appreciation (grow your money)
- Balanced
- Capital Preservation (preserve your money)
A rule of thumb implies that as we get older, our ability to take risks (grow money) diminishes
Let’s assume I have N100m and a 20-year investment horizon, but I am investing for the “future” Is real estate a good investment? Well it depends
First, let’s assume the rental yield is 10%, meaning if I invest N1m, my rent is N100,000. Also, assume inflation is 15%.
If I am 35 years old, and my company gave me a low-interest loan, and I want to invest that loan as my retirement fund (grow money), is property a good idea? Hell yes
I can lock my N100m in; my income yield does not beat inflation, but the asset appreciation is locked in due to inflation; if I sell my house in 55 years, I receive an amount that has captured inflation for 20 years. Remember, in my objective, rental income was secondary to Capital Appreciation
I have the same assumptions, but assume my age is 55, I am about to retire, and I have the same N100m to invest, representing the bulk of my gratuity for my years of service with my employer. I need current income because (preserve money) I will no longer work actively.
Property? Hmmm
I need guaranteed income (to preserve money), not capital appreciation (to grow money). I need an asset that guarantees me a consistent “salary” (preserve money), not one whose value will appreciate without current income (grow money)
Property is only suitable for me in my later years if I can extract income from it to replace my salary (preserve money). Price appreciation is not as critical as income for me at retirement. Remember, the property investment is to replace my salary.
Thus, income is so important to me at this age that I can even forgo a REAL return (preserve money), meaning it beats inflation for lower volatility (peace of mind).
Same property, same nation, different responses. We must not confuse asset price appreciation with investment yield
A 35year investor can invest, ride out volatility and has sufficient compounding periods to “recover” should extreme volatility wipe away investment capital
A 55-year-old investor does not have the luxury of sufficient conpiubdibg periods. Protection of capital at this level is more important
Therefore, there are no good or bad investment options; there are only bad choices
If you need current income, the asset class choices open to you in the fixed income space, such as Treasury Bills, Fixed Deposits, Bonds, etc., will offer income but not capital appreciation. Yes, you can compound your interest, but you are still earning Interest on your principal
If you, however, desire to grow your principal sum without requiring current income as a principal goal, then your investment choice will include variable-return assets like Stocks
In summary, it’s not the assert class we should focus on. Instead, it’s the investment objective, risk and time horizon for investment that determine what asset to invest in.
This is educational and does not represent investment advice
