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Making right choice for investment is very important for once's financial independence with desirable returns and security of the capital invested. Numerous question may confront you whenever you have considered investing. Maybe, you didn't know where to begin. A moot question is: Does the news of people losing money in the stock market worry you? Are you concerned when the newspapers are full of unpleasant news? These fears at the outset are completely understandable.
As we approach the end of 2024, this year leaves behind a blend of concern, uncertainty, and the hope of rebuilding to make our country a better place. Life has not been easy since 2020, particularly from an economic and financial perspective. High inflation, soaring unemployment, liquidity crisis in the financial sector and political instability have taken a significant toll, leaving most people unsure of what the future might bring.
The economic challenges of recent years are becoming increasingly evident. Inflation has been steadily rising, reaching 10.05 per cent by September 2024, a significant increase from 5.60 per cent in March 2020. This sharp rise in inflation has strained household budgets, reducing purchasing power and increasing the cost of living. At the same time, the stock market has experienced a prolonged decline since its peak in 2021, reflecting reduced investor confidence and broader financial instability. Meanwhile, the significant rise in the yield of the 364-day treasury bill from 7.59 per cent in March 2020 to 11.99 per cent in November 2024 reflects tightening monetary conditions and heightened borrowing costs for the government. This increase not only indicates rising inflationary pressures but also implies the pressure on public finances as the cost of debt servicing surges. Moreover, the depreciation of Taka highlights the external pressures on the economy, resulting in a widening trade deficit and declining foreign-exchange reserves, making economic recovery more difficult.
As the economy faces challenges, do you have alternative plans to enhance your financial strength?: Strengthening financial stability during difficult economic times is essential for everyone. The frustration of stagnant salaries and rising prices of necessities is a common experience for most people in Bangladesh. Many now limit spending to essentials, treating entertainment as a rare indulgence with little income left to save. Often people attribute these struggles to the larger obstacles facing Bangladesh's economy.
However, you can achieve financial independence by making the right choices of investment. While macroeconomic events remain beyond individual control, efficient management of money can help you endure unexpected setbacks.
During times of economic uncertainty, investors often face difficulties in how to allocate their capital. In Bangladesh, popular investment options include land, houses, national savings certificates (NSCs), and commodities such as gold. Nevertheless, these alternatives often come with concerns such as liquidity limitations, price volatility, or inadequate returns.
Conversely, although stocks may promise substantial returns, their volatility and associated risks can expose investors to the risk of losing capital during challenging periods. This is where government treasury securities can play a key role in securing returns for the future. Historically, returns from government treasury securities have exceeded those of equities during economic downturns, offering investors a reliable income source while also safeguarding their capital.
With all the talk about inflation, it's important to invest in assets that protect against it. Currently, government Thorough research is essential before making any investment decisions. Once you have invested, regularly review your portfolio, as what seems like a smart investment today might not remain so in the future. securities are offering the highest yields ever, and they are likely to have reached their peak. This presents a great opportunity to invest in government treasury bonds. On the one hand, they offer safety, and on the other, you can lock in a longer-term investment while benefiting from periodic interest payments as a steady income source. Investing in government treasury securities presents an attractive opportunity in a high-interest environment. Additionally, as interest rates decline, bond prices increase, providing the potential for further capital gains.
A moot question arises if investing in government treasury bonds is the only ideal option right now: Historically, equities markets have underperformed when the bond market offers the best yield. Investing in bonds does not necessarily mean opting out of equity investments. Most people overlook that equities trade at an attractive valuation when all the eyes are on fixed-income instruments. Bangladesh's equity market has experienced a prolonged price floor, causing even well-established growing companies to remain undervalued. As the market went through a significant correction with the removal of the price floor, you can seize the opportunity to buy shares of the best businesses poised for growth as the economy recovers.
In addition to potential price appreciation, you also have the chance to earn dividends, which can further enhance your returns. While building a business may not be your career goal, investing in companies with a stake in key sectors allows you to benefit from the growth these businesses will experience. When the market is down, it can be an opportune moment to invest in top-performing stocks and hold them until they become overvalued. Stocks, though riskier, offer the potential for compounding returns, enabling your money to grow and build greater wealth over time.
According to Warren Buffet: "Don't pass up something that's attractive today because you think you will find something better tomorrow." It correctly advises us that if we know it is a great business, we should buy now rather than wait for future price cuts. Because, in the end, pricing is just what you pay, and holding the stock for the long term will provide value.
Ideally, your investment strategy should be based on your risk appetite, emergency funds, and existing wealth allocation, incorporating both equities and bonds. If you are young, this might be the perfect time to invest more in the equity markets, taking advantage of the recovery and watching your stocks grow. On the other hand, if you are closer to retirement, it would be wise to lock in bonds for stability and a reliable income stream.
Why it is important to diversify wealth and set a budget for income allocation: Financial independence allows you to sustain your lifestyle without worry, making it a goal worth prioritising. Starting early in your career offers more opportunities to earn, save, and invest, establishing a solid foundation for future financial stability. While the future remains uncertain, taking proactive steps early can help mitigate potential financial challenges and emergencies. To achieve this, it is essential to allocate income towards investments in both equities and bonds, allowing them to grow passively and provide long-term financial relief.
For many, deciding where to invest can be a challenge. Renowned American investor Peter Lynch said, "Know what you own, and know why you own it." Understanding which businesses are worth investing in, analysing the market, and deciding when to sell or increase your position is no simple task. Thorough research is essential before making any investment decisions. Once you have invested, regularly review your portfolio, as what seems like a smart investment today might not remain so in the future.
If finding and tracking the right investment seem daunting, there are investment products managed by professional fund managers who actively handle the responsibilities of research, monitoring, and decision-making on your behalf, ensuring your investments are actively managed.
So, if you are a beginner, you may choose open-ended mutual funds that align with your interests and goals. If you are looking to gain exposure to the equity market, you can consider traditional mutual funds, or Shariah-compliant funds, which invest particularly in stocks that adhere to Islamic principles. Moreover, if you are looking for stable returns, fixed-income funds offer a competitive option, especially given the current high yields from government treasury securities. Even with a small investment amount, investing in a fixed-income fund will allow you to enjoy a competitive higher yield than the market offers. In the end, while economic performance is unpredictable, its impact shapes your present and future. Seizing the right investment opportunities at the right time is the key to achieving financial independence.
The writer works as a Senior Investment Analyst at UCB Asset Management.