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The importance of investing even within a recession November 23, 2016

It is not secret that Nigeria is officially in a recession. The recent official pronunciation by the government only made clear what many already knew. While things are tough, it is critical to remain forward-looking as there are opportunities even within tough times like these.

Investments are an essential part of preparing for the future and creating long-term wealth. Nigeria’s failure to invest in infrastructure and revenue diversification has put it in a difficult place of depending on a single source of revenue. With the price of oil remaining low and the production challenges the country is having, the near future is quite uncertain.

Similarly, individuals who are dependent on a single source of income expose themselves to the same sort of risk. Accidents happen, ill health happens, retrenchments and weak business periods happen. Investments create a financial buffer against tough periods or difficulties with one’s main source of income. Furthermore, they are an essential part of preparing for the future and creating a layer of wealth for those periods where an individual is unable to work for whatever reason.

Beyond preparing for difficult times, a continuous investment habit is an essential strategy for long-term personal financial growth and development. In the same way Nigeria needs to invest in non-oil revenue sources despite the tough financial times, individuals need to continue to grow their investment pots despite the recession. Whether you’ve come into the recession with a strong investment background or a weak one, it is crucial to establish and maintain the habit of building your investment portfolio. Things may tight but the investments you make today will be a fundamental part of a robust financial future. Maintaining a consistent saving and investment habit even when times are tough allows you to build a strong portfolio over time.

During a recession, you want diversity within your portfolio. Diversity means that you are invested in a range of assets, rather than one single asset. This is important because it reduces your exposure to the up and downs of a single company or stock, and spreads that risk over a larger pool of investments. Mutual funds are a good way to invest in a diversified range of assets. Also referred to as a unit trust, mutual funds are an investment vehicle that pools the money of many individuals to invest in stocks, bonds, money market securities, real estate or some combination of these.

When one purchases a share in a mutual fund, it is as if they have bought a portion of an investment basket, thus making the investor a stakeholder of all the investments in that fund. The entire basket is managed by a fund manager who spreads it on the money market with the aim of making profit for the investor. Mutual funds raise money by selling shares to the public, much in the same way any other type of company can sell stocks to the public. They then take the money they receive from the sale of their shares, along with any money made from previous investments, and use it to purchase various investment vehicles according to the structure of the fund. Some will invest in a range of equities, others in government bonds and others in money market instruments like Treasury Bills and Commercial Papers. Shareholders are free to sell their shares of the mutual fund at any time, with the value determined by the performance of the securities held by the fund.

Even in these tough times, you should continue to build your investment portfolio. Mutual funds offer an opportunity to continue to do so, especially as some funds will accept investments low as N5000 to start.

Click here to invest in a mutual fund for as little as N5000.

Source: The Guardian