The ongoing Russian invasion of Ukraine has rippled economies across the globe.
The cost of living is skyrocketing. Amidst all this, you might be wondering how you can protect your money and investments from economic erosion.
Do you sell your investments whose prices are threatening to crash? Do you wait to buy more at a bargain? According to investment strategist Don Bennyhoff, making financial decisions based on an emotional response to major events always often ends up with long term losses.
“Making a radical change in the midst of all this uncertainty is usually a decision that you will regret,” he says.
When economies are on a slowdown, your level of risk tolerance is the common denominator that should determine the money decisions you make.
For example, Bennyhoff explains that if you’re keeping money in a bank savings account, the interest you’ll be paid will be at risk of being canceled out by inflation.
While you’ll lose your buying power, you might be able to salvage your principal instead of losing it all. However, you don’t have to stick your money into a savings account that is being outpaced by inflation when there are better options out there.
USD and Gold
According to Robert Ochieng, an investment expert and the founder of Abojani Investments, investors tend to hedge against risk during times of extreme volatility by investing in commodities, gold and foreign currencies such as the US dollar.
He recommends that if you have good money right now and are looking for a safe haven, you may consider USD fixed deposit and USD based money market funds. CIC, Britam, NCBA, and Nabo Capital are some of the local insurance and investment firms that offer USD money market funds.
“It is good to have a target of holding investments of $1000 and above in US dollars over time. This is the equivalent of Sh114, 000 and above,” says Ochieng. “There are also exchange traded funds for commodities that investors can use to gain exposure in commodities such as wheat, corn, oil and natural gas.”
Although Gold could be an option, it is currently trading at its highest levels in over a year. This has been exacerbated by the volatility the market is experiencing from the Russian invasion in Ukraine.
Locally, Ochieng says that platforms that offer investments in Gold include the Waanzilishi Capital’s Ndovu Gold Fund whose investment minimum is as little as Sh5,000. There is also the ABSA New Gold ETF which is listed at the Nairobi Securities Exchange for as little as Sh20,000.
According to the NSE chief executive officer Geoffrey Odundo, ETFs allow investors to spread their risks, diversify their portfolio as well as have ease of purchase and exit. “Globally, gold has emerged as one of the most reliable safe havens of wealth, remaining largely unchanged in the long run despite the short-term market volatilities,” he said.
Offshore
When looking for a safe haven for your finances, Ochieng explains, you may want to consider offshore exchange traded funds. Examples of these include the Invesco DB Oil fund and Invesco DB Agriculture fund. “They could also look at individual stocks such as Mosaic Co which is listed on the New York Stock Exchange. This is the largest US producer of potash and phosphate fertiliser and Vale SA which is the largest producer of Iron Co and Nickel in the world,” he says.
Liquidity
Always prioritise liquidity when faced with reactionary events such as the economic slowdown due to the Russian invasion of Ukraine. This means that you should have adequate liquid assets for your most urgent needs.
These liquid assets include having cash money, money saved in money market funds or short-term fixed income instruments.
These highly accessible liquid assets are supposed to cushion you against unexpected emergencies and any upcoming huge expenses such as school fees for the upcoming new academic year in April.
If you are inching close to retirement, your liquid assets should be regular enough to cover a year or more of your expected living expenses that you would ordinarily pay for with withdrawals from your portfolio.
The last thing you want is to have assets but stay cash poor amidst a global recession or a global economic crisis. Remember, the ripple effect of being cash poor could be joining the queue of people who own illiquid assets who are selling their properties under stress to fund their liquid needs.
If you just retired or received a lump sum payout, you will do well not to deposit it in a bank account where you will be making withdrawals whenever the need arises. Assuming you get a retirement lump sum pay of Sh 3 million. How you budget for passive income out of this amount will determine your financial liquidity amidst the ongoing economic crisis.
For example, instead of depositing the full amount in a bank account where it will earn interest at below the inflation rate, you can choose to put it in passive investments where they’ll earn above the inflation rate.
According to the Central Bank of Kenya, the inflation rate for the month of February was 5.08 per cent. This means that your money will be losing value if it is earning you interests that are 5.08 per cent or less. Stay above the inflation rate.
For instance, out of the Sh3 million, if you choose to put Sh1.5 million into a government bond earning an interest of about 12.5 per cent per annum, you will earn about Sh187,500 in interest per year or Sh93,750 every six months.
This will be equivalent to Sh15, 625 per month. If you choose to put the remaining balance in a money market fund at a rate of 10 per cent interest, you will be earning an additional income of Sh150, 000 per year. The beauty of the money market fund is how easily you can access it and its low risk factor. BY DAILY NATION