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Investment Options For Salary Earners by prof2007: 8:34am On Oct 11, 2019
Since salary is assumed to be the only source of income for the salaried, it is advisable such an individual fortify himself financially before investing so that adverse investment performance will not have untold effect on him and his family. Therefore, if you are a salaried prospective investor, you need to:

1. GET LIFE INSURANCE
Most families in Nigeria are single income families. If anything bad happens to the income earner, the family gets shattered, at least financially. Again, given the risks inherent in capital market investments, it is only prudent to have life insurance as a first step in one’s investment journey. It is baffling to see many investors very deep into the market, yet they do not have life insurance.

Life insurance is and should be a basic part of any financial plan. Life insurance is a protection for loved ones against financial hardship arising from the death of a breadwinner. This is even more important today than ever before with high cost of funeral expenses, college education and medical bills. So, the first investment option for a salaried individual is to get a life insurance.

2. PREPARE FOR FINANCIAL EMERGENCIES
Life is full of surprises, emergencies do happen, jobs are lost without notice, and even good investment opportunities emerge sometimes suddenly. There is, therefore, need for a cash reserve to help weather financial storms and emergencies.

Cash reserves not only provide for emergencies, they also help ensure investments are not liquidated prematurely or at inopportune times to cover unexpected expenses. There are no hard and fast rules on what the exact amount of the required cash reserve should be, but most financial experts and planners will advise an amount that equals about six months of living expenses.

So, as a salaried person, your next investment should be to have a cash reserve. A cash reserve should not necessarily be in a savings account or under the mattress; it could be in an interest-bearing money market account, money market mutual funds with low to zero luck-up period or another form of very liquid investment that is readily convertible to cash without loss of value.

3. KNOW YOUR RISK APPETITE
As a salaried or fixed income individual, your risk appetite/tolerance is most likely going to be low. You need to know or understand your risk tolerance before engaging in any capital market investment. Your risk tolerance will and should drive the type of investments you go into. Your risk tolerance depends on your psychological makeup, current insurance coverage, presence or absence of cash reserve, family situation, and age, among others.

Talking about family situation, it is reasonable to think that a married individual whose children are still in school will be more risk averse than an unmarried person. On the other hand, older people have shorter investment time horizon to make up for any losses. The reason for this is because the older you get the less time you have to work to recoup losses.

In that case the risk tolerance of an older man will be less than those for younger folks. Again, the more cash reserve and insurance coverage you have, the more your propensity to take risk. Now having known your risk tolerance based on the underlying factors, you can then define your investment objectives

4. SET YOUR INVESTMENT OBJECTIVES/GOALS
Having met those essentials above, you are now ready for a serious investment plan. A good investment plan starts with investment objectives. Investment objectives are the force that determines what you invest in. Investment objectives range from capital preservation, to capital appreciation and constant income generation.

Capital preservation as an investment objective implies that the investor aims at minimising risk of loss by maintaining purchasing power of the investment. So, if you are risk averse or will need money from your investment soon for children’s education or building a house or are nearing retirement, this should be your objective. Investors who aim to see their investment portfolios increase in real terms over a period of time are better suited for capital appreciation as an objective. This is better for investors that are more risk tolerant and those with more potential to recoup losses.

If you are already retired or nearing retirement, and therefore depend on your retirement plan supplemented by investment income, you need an investment that generates income rather than capital gains. In that case, your investment objective should be current income generation. It is always good to have investment goals stated in terms of risk and returns.

5. DECIDE ON ASSET ALLOCATION
Armed with the knowledge of your risk appetite and investment objective, you are now ready to decide on what to invest in, and how much to invest in any asset class. This takes you to asset allocation decisions. Asset allocation involves dividing an investment portfolio among different asset classes based on an investor’s financial requirements, investment objectives and risk tolerance.

A right mix of asset classes in a portfolio provides an investor with the highest probability of meeting his/her investment objectives. Asset allocation is the most important investment decision an investor can make in a portfolio because it demonstrates an investor’s understanding of his or her risk preferences and return expectations.

It is good to strive for a diversified portfolio. Unfortunately, the Nigerian market does not provide a lot of asset classes for optimal diversification, but diversification can be achieved across sectors or industries within the few asset classes in the Nigerian stock market.

6. DECIDE ON HOW TO INVEST
There are different ways to invest in the capital market. You can invest directly by making stock selections by yourself, thanks to the online stock trading platforms that abound the world over. This implies you have what it takes to conduct required research and analysis of companies whose shares you wish to buy. It also implies you have what it takes to know when to sell or add to existing positions.

Another method is to have someone “do the heavy lifting” for you. In this case, that someone, often times called fund manager or portfolio manager, does the research and analysis and selects shares that suit your investment preferences, investment objectives, risk tolerance and appetite as well as your investment time horizon. This route is most suitable for investors that lack the knowledge and time for the required research and analysis. If you decide to go this route, mutual funds are the best bet for you.

SOURCE (abridged): https://nairametrics.com/2019/10/10/investment-options-for-salary-earners/

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