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Risky by Nature

“Edosa, check out these guys…I just put ₦300k, but I want to put more…they give 25% in 3 months, let me know what you think…are they legit? Excerpts from a phone call with a friend of mine last weekend. I have grown accustomed to variations of this question mostly from millennials. So, I did some thinking.

The rate is so high, that it seems too good to be true. Why would someone want to take the risk? We have all heard stories of similar investments going bad – delayed repayment, partial repayment, no repayment at all. So why do some give it a second thought?

Let’s take a few steps back. Let’s walk in the minds of someone facing this dilemma. Before being faced with the choice of investing in x or y, you probably already had a passive desire to invest someday (either with your idle cash or borrowed cash).

We are in the digital age, the age of information overload, so you probably have different investment options flashing at you on social media, blog posts, and so on. You see a few that pick your interest, then whenever you have the funds, you invest. All good so far.

The Right Risks

Also, a rule of thumb says, the younger you are, the more your appetite for risk. Young people usually have less dependents, less obligations, generally less to lose, so might as well take some risks. But are we taking the “right” risks?

“If you don’t know where you want to go, then it doesn’t matter which path you take.” Why am I investing? What do I want to do with the returns from my investments? I think we need to ask ourselves these questions more. If you are investing ₦100 to buy a car a year from now that cost ₦125, your main concern is to make ₦25 on your initial investment during the year. If you were investing ₦100 to pay for your rent of ₦125 by the end of the year, you will have a similar concern.

Some of my colleagues believe that we mostly invest simply to have more than we did yesterday, and to keep up with expenses (inflation is the unseen robber of those who have saved – Margaret Thatcher).

If this is true, then it explains our search for the highest possible return, and our dismissal of the possibility of losing our savings if our investment in x or y turns sour. Perhaps it is a behavioral bias in response to how investment opportunities are presented. The upside (expected rate of return) are highlighted and overly emphasized, with little mention about the risk. So in a quest to grow our wealth, we may be taking detrimental (and in some cases, unnecessary) risks.

Be Deliberate

Now we need young people to take risks, but it is also important that they take the “right” risk, lest we raise a generation that are scared and shy away from investing.

Perhaps young people should embrace goal-based investing. Tying a specific, measurable goal to each investment. Like the car and school fees example above. Although the desired return of 25% are the same, the sort of investment options you will consider to meet your goal for buying a car, are different from those you will consider to meet your goal of paying your rent.

Put differently, if you end up losing your entire ₦100 investment meant for rent, the consequence is vastly different and more detrimental than if you lose the ₦100 investment intended for buying a car.

The importance of the goal, and the timeline really help you narrow down the sort of investments you want to make in order to meet that goal. It fundamentally forces you to consider the risk, because you are no longer investing for a vague idea, but a specific & measurable goal that is important to you.

Voila! Now we have a better approach to deciding which investment option to go with. A follow up challenge could be the difficulty in finding suitable investment options that meet your unique needs. We will discuss this one day.