By Tony Mallam
Saving money is one of the most effective tools that anyone can use for building financial security. Savings also help build peace of mind around our ability to weather uncertainties or financial emergencies, and help to build wealth. Additionally, saving is often foundational for investment to take place, which means a high personal savings environment is most likely to lead to increased personal investment.
Across Africa, savings have historically been low. This trend is attributed to a range of factors such as low income, complex and inaccessible formal savings products, and sometimes a lack of financial infrastructure. Combined, these make it harder for it to be possible to not only put money away but ensure that money is able to generate its own additional value.
According to a joint paper by the Department of Economics and Department of Statistics at the University of Abuja, many African household economies remain detached from the formal economy. This as they acquire savings in terms of assets rather than banks with their portfolio arrangement largely based on physical assets rather than financial assets.
However, across the continent, this low savings landscape has steadily been shifting in recent years as a result of increased digitalisation, broader access to financial services, and the emergence of a diverse number of savings and investment vehicles. Today, beyond traditional investments like stocks, bonds, and cash, African investors now also have access to investment vehicles such as commodities, cryptocurrency, micro-investments and so much more.
More and more Africans are saving and investing more of their money. This is particularly true for the continent’s rapidly growing young, and digitally-savvy, population as young people across the globe become increasingly active in the investment market. In fact, investment by young people under the age of 30 grew from 4.5% in 2018 to 9.9% in 2021. So as more people across the continent delve into the ever-evolving and changing world of investment, how are they best taking advantage of these new and trusted opportunities in the year ahead?
Diversifying your investment portfolio
The age-old and well-proven proverb to “not put all your eggs in one basket” could be especially poignant when approaching investment, particularly for first timers dipping their toes into the market. One way more seasoned investors try to avoid this scenario is by not placing all their money into one single sector or investment.
It’s said that through investment diversification, investors are able to spread their money into a variety of assets and different investment types. This then ensures that they’re not too exposed to the any surprise negative impacts of any one of those investments becoming compromised by economic or other forms of volatility. This means that no single investment presents too much risk and increases the likelihood that some investments will do well when others don’t as each asset will likely perform differently in different economic times.
Stacking your investments to minimise risk
While a diverse investment portfolio is advantageous, it’s also important to not simply rush into establishing one. This means being cautious about where and what you’re putting your money into by slowly building up your investment portfolio.
A more cautious approach popular with savvy investors is to put their money into a number of investments across a range of risks and returns, a method known as investment stacking. The range of different risks and returns gives them the best chance to effectively take control of their financial future.
Essentially, investment stackers encourage starting off your investment journey with lower risk investments such as retirement annuities and index funds (which often carry lower yields of returns) and steadily working your way up to acquiring more higher reward investments such as real estate and company stocks (which in turn come with increased risk) as you become more financially astute.
Be discerning about what you’re investing in
Some investments carry more risk than others, but all investments will carry at least some risk. That’s why it’s important to determine just how much risk you’re happy with taking and identify the investment options available to you that fall within this margin of risk that you’re willing to accept.
Most importantly, with the plethora of growing investment vehicles now readily available to them, it’s vital that African investors rather stick to proven, credible and trustworthy investment options instead of jumping into the often short-lived excitement of trying to get into “hyped up” investments at the “right moment”. This means do your research, make use of professional guidance if you can, and have a clear plan that maps out what you’re looking for in terms of risk, returns, and your investment goals.
Tony Mallam is a Managing Director at upnup
BUSINESS REPORT