Financial planning, in simple terms, is having a plan for your finances in a manner that protects your cash flow from dissipation and/or loss.
Financial planning is a process; if you wanted a step by step guide on how to establish a financial plan, it would be: First, agree on a plan — what do you want to achieve? By when? Then, start an Emergency Fund, and settle your life insurance to protect your dependants from loss of your income. Only after you have done these can you start the journey of investing current income into available asset classes.
What should an investor do in these uncertain times of financial loss and meltdown in asset values?
Look at your financial goals. Have they changed? If they have not, do not make any strategic financial decisions that will change your investment portfolio because of current uncertainties. If you have an RSA, or any investment fund set aside to invest money for the long term (more than 36months), then absolutely ignore the noise today and keep investing.
Being worried is understandable in this time of global economic uncertainty, but do not simply dismiss your carefully prepared, long-term investment plan. If you own a good dividend-paying asset, be careful about selling because the price of that asset is falling. Selling an asset as prices fall is simply actualizing that loss, i.e., you move that loss from paper to reality.
Review Your Budget
Remember, cash is king; it’s time to go over your budget and cut back on discretionary spending plans that drain cash away and reposition your budget for saving and only necessary spending. The coming months may see job losses and bulk buying of commodities, e.g., food. Prepare for this, keep the non-essential capital investment down, and keep physical cash nearby. You can use your emergency fund and prepay for purchases, then simply replenish your fund later.
Tap Into Your Emergency Fund
Even with a plan, you still have to pay bills, so if you need cash to cover non-discretionary expenses, this is the time to tap into cash and near-cash saved in your Emergency Fund. An Emergency Fund is where you save 3 to 6 months of your non-discretionary expenses, i.e., expenses you must make like food and rent. An emergency fund is an important part of any financial plan, as it stops you from selling down your assets at a lower price to meet expedient cash needs.
Keep Paying Your Bills
If you have credit cards and loans from banks, make sure you are making the minimum payments to ensure your credit score does not take a hit. Yes, it’s tough, but a good credit score is very important, as you can get lower Annual Percentage Rates on new applications for loans.
As the market prices fall, keep investing if you already do so constantly. If your employer matches your retirement contributions, then keep investing, don’t lose that benefit. The goal for you is to adopt a Naira Cost Averaging approach. Naira Cost Averaging is simply buying the same amount of a share at regular intervals, no matter the price. The volatility in uncertain times means that as share prices fall, the investors are also able to buy shares at that lower costs, helping to reduce the average cost per share and positioning the portfolio for positive return.
Keep in mind that this strategy only works with shares, not fixed income instruments like bonds.
Look For Opportunities
Keep in mind that the market prices of many assets are indeed falling, but the values of these assets may not have fallen in the same proportion.
For example, Zenith Bank Plc’s share prices have fallen by 46% over one year, but the PE is 3.87 with an implied dividend yield of 23% (on N2.80 divided) higher than the double-digit Nigeria inflation rate of 12.2%. Look at the market prices falling as an opportunity to own quality stocks at a good bargain price.
Another example? The S&P 500 has fallen 31% since February the 19th, the market is essentially pricing in a zero earning for most of the 2020 year; there are also headwinds with a crude oil price war between Russia and Saudi Arabia, but does anyone believe the markets will remain at negative 30% for the coming 9 months? Is this a buying opportunity? What about China? Down 16% YTD, are Chinese stocks a discount today?
We have no way of predicting the future, but it’s better to acquire blue-chip, well-capitalized stocks, in a growing market segment like Alibaba, at a significant discount to her 52-week closing price.
Pay Down Debt
Corporations also have cash needs. If you owe a debt, significant debt, it may be a good exercise to call up your creditors and seek better terms on those loans. The enemy of bank lending is uncertainty, however, lack of bank credit in the system will create a cash crunch and most institutions will offer great terms if you were paying down your loans.
Start to prepare a list of possible assets you want to buy. What should be your criteria for buying risky variable return assets?
- Companies in a sector producing essential goods and services.
- Highly capitalized blue-chip stocks.
- Price Earnings Ratio below 15.
- Dividend yield offered well above the market average of 4.5%. Keep in the mind inflation rate of 12.2%.
- High volume traded, average 1m traded share volume in 90 days.
However, you can keep it simple by looking at buying the index that tracks the stock markets, e.g., for equities, the Global X MSCI Nigeria ETF (NGE) invests in the largest and most liquid companies listed on Nigeria Stock Exchange. To hedge, buy fixed income; I prefer bank Commercial Paper because it offers higher yields than Sovereign bonds, but watch the issuer.
Remember, investing is risky. You can lose 100% of your capital; always seek advice before investing.