Investing for the Risk Averse

Let’s say you’ve heard the whole drill about equities and commodities investment, buy you’ve looked at yourself as an individual, guaged your risk appetite in the light of the last recession and personal circumstances, and just decided that they aren’t for you? What then?

For some people, their immediate instinct is to hold cash deposits essentially forever. After all, you cannot argue with money in the bank. And that is true. But there are many reasons for investing, and not all of them are for capital growth. Infact, the first reason for investing is the preservation of purchasing power, which is what money is. Currency is just the way we exchange purchasing power for actual purchases. One could sit on currency, and be losing money due to inflation. Therefore, I could never, in good conscience, advise anyone to hold cash.

Instead, there are a number of almost risk-less assets one could invest in, with almost complete certainty of being protected from inflation,and in some cases, even increasing your purchasing power over time. One of them, and arguably the safest securities to be found anywhere, are US treasury bonds. Or even better, Treasury Inflation-Protected Securities which essentially are matched to inflation. You can open an account at TreasuryDirect to buy them online. You can also buy a portfolio of investment grade, or just below investment grade US Corporate bonds, which yield between 2-4% depending on your investment horizon.

If you want to venture further afield, you could buy either sovereign bonds (FGN Bonds, for Nigeria) or Certificates of Deposits in some emerging market countries (ones which you can understand properly and the risk of default is considerably lower). I’d recommend India and Nigeria (although for the latter, if you’re a Nigerian in the US, you might be better of holding your CD in naira to avoid the recent forex control measures by the CenBank). These countries have relatively low default risks (as low as emerging markets can get anyway) but due to domestic inflation and less than robust demand, offer interest rates of between 12% to 15%. Adjusted for taxes, you could still make above 10% returns. If you use Interactive Brokers, which allows you to hold money and securities across many different countries and currencies, you could get additional protection against the inevitable FX risk.

Of course, if you’re too risk averse to even venture down any of these routes, you can always do the safe thing and hold money market accounts. The yields on these being what they are (aka, almost nothing), I only advise it for when you want to pool or save funds over time for something like real estate investment or some other project that requires cash outlays.

Which brings us to the final investment for the risk averse: real estate. But not just any real estate. Directly held property, not REITS, not real estate developments you can ‘buy’ into, but physical, preferably rental properties in Nigeria, intelligently set up in the right location, will make you healthy returns. And since you hold the property directly, there is less risk of losing out. If the capital outlay is a little uncomfortable, you can get together with likeminded people, contribute the capital through a corporation and make the real estate investment that way, so that if anything happens, the risk of loss is limited to your share of the capital. Given the realities on ground in Naij, this is almost a no-brainer.

There are definitely other avenues that someone who distrusts speculative investments like equities, commodities and so on can still build a healthy investment portfolio. If you can think of others, please comment below or hit me up on twitter @eldivyn.

Go win.

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