{"id":74,"date":"2016-05-31T09:30:58","date_gmt":"2016-05-31T08:30:58","guid":{"rendered":"http:\/\/nationaltimes.com.ng\/?p=74"},"modified":"2016-05-31T09:30:58","modified_gmt":"2016-05-31T08:30:58","slug":"managing-equity-investments-during-market-downturns-fdc","status":"publish","type":"post","link":"https:\/\/nationalwire.com.ng\/sub\/managing-equity-investments-during-market-downturns-fdc\/","title":{"rendered":"Managing equity investments during market downturns – FDC"},"content":{"rendered":"

In this time of economic slowdown investors may be asking them-selves if they have the appetite to stay in the market. Periods of recession or economic downturn are rife with uncertainty, dampened appetite for investments and heightened risk. The natural response in such periods may be to delay investing until conditions improve. In extreme cases, investors may pull out of the markets all together. The financial crisis\/global recession in 2008 left a bad taste in the mouth of investors. Some vowed never to return to the stock market while others reduced their participation to the barest mini-mum. The Nigerian stock market was not exempt. Between 2008 and 2009, investors witnessed significant erosion in the value of their investments as the market lost N7.24trn from a high of N12.64trn.2 This saw reduced participation in the stock market for both foreign and domestic
\ninvestors.<\/p>\n

As the current economic slowdown shows its ugly head, investors will be less likely to make the same mistakes as those made in 2008\/2009. As the old saying goes: once bitten twice shy. Investors are likely to remain on the sidelines until there is some semblance of recovery. While accepting that this approach (which is purely risk averse) is understandable, there are approaches to investing that can be used when transacting in the stock market especially during downturns. Most importantly, investors must respond strategically rather than react to market developments in periods of slowdown. With a bit of pro-activity and flexibility, investors can still participate in the market, despite the economic downturn.<\/p>\n

Here are a few ways on how to stay invested:<\/p>\n

\u00b7 Take advantage of lower stock prices to increase their holdings especially if they have a long term outlook. By purchasing additional stocks, investors also reduce their average unit cost of purchase. Another good strategy is identifying oversold stocks to purchase (i.e buying into a stock that has seen a lot of selling and is ripe for a turnaround).<\/p>\n

\u00b7 Invest in dividend paying companies with consistent paying policy or defensive stocks with good dividend history.<\/p>\n

\u00b7 Manage losses \u2013 Markets exaggerate themselves in the\u00a0direction of losses. Therefore losses have to be minimized. This can\u00a0be done by setting and adhering to price limits. Stop loss orders,\u00a0usually executed by brokers, are designed to limit investors\u2019 loss on\u00a0a position in a security. With a stop loss order, a market order to\u00a0sell is triggered when the stock trades below a certain price and it\u00a0will be sold at the next available price.<\/p>\n

\u00b7 Be ambivalent about bear markets \u2013 adopt the right mental\u00a0approach, knowing there are opportunities also in Bear markets.<\/p>\n

\u00b7 Diversify across asset classes and investment types to\u00a0reduce risk. Having a percentage of your portfolio spread amongst\u00a0stocks, bonds, cash and alternative assets such as real estate assets,\u00a0is the core of diversification. A proper asset allocation strategy\u00a0will allow you avoid the potentially negative effects resulting from\u00a0placing all your eggs in one basket.<\/p>\n

\u00b7 Invest in assets that help preserve capital.<\/p>\n

\u00b7 Avoid increasing your borrowing especially to invest in the\u00a0stock market. This is clearly not a time to increase leverage.<\/p>\n

\u00b7 Consider Inverse ETFs. Investing in ETFs is similar to using\u00a0a combination of advanced investment strategies to profit from\u00a0declining prices. Even though these are instruments which are not\u00a0available in the Nigerian investment space, they are readily\u00a0available in developed markets.<\/p>\n

\u00b7 Play safe. Playing safe means putting a larger portion of\u00a0your portfolio in money market securities such as fixed deposits,\u00a0treasury bills and other instruments with shorter maturities and\u00a0acceptable yields<\/p>

\r\n
Advertisement<\/div>\r\n\t\t\t\t\t\t\t<\/a>\r\n \r\n\t\t\t\t\t\t\t<\/div>\n

Investment strategies have to be dynamic. Different strategies should\u00a0be adopted in periods of boom and bust. The best advice one can give\u00a0during a recession is to take the time to revisit long-term goals, and\u00a0adjust overall asset allocation to protect assets.<\/p>\n

It is important to note that in spite of all the strategies out there,\u00a0nothing is entirely foolproof. It is expected that investors proceed\u00a0with caution and also seek the services of professionals who would\u00a0offer guidance.<\/p>\n

Economic Investments from a Different Lens: The Advantages of\u00a0Investing in Trust<\/p>\n

The current economic slump plaguing Nigeria has led to a debate: what\u00a0measures Nigeria should have taken to better equip the economy against\u00a0these negative shocks? Economists have long come up with theories to\u00a0help facilitate sustainable long run growth. There is the neoclassical\u00a0model of growth, which stresses physical capital investment through\u00a0savings (as savings are a medium for investment funding), a reduction\u00a0in population growth, and technological progress. Then there is the\u00a0endogenous growth model, which stresses accumulating human capital – a\u00a0knowledge-able and productive workforce – through education and grants\u00a0for research and development. The expectation is this investment\u00a0leads to innovation, which moves the economy forward; as a few\u00a0entities gain knowledge in a particular sector, all others in the\u00a0sector are able to partake in this process through knowledge transfer\u00a0and imitation. \u00a0These theories have helped shape policies in many\u00a0countries. However, they come with their own draw-backs. These\u00a0drawbacks include the inability of these models to fully explain\u00a0growth movements in country samples. The neoclassical model indirectly\u00a0argues that long-run growth movements are outside the control of\u00a0Nigerian policymakers and are hence subject to external factors,\u00a0these factors being elements that drive technological change.\u00a0Endogenous growth models do not acknowledge the catch-up factor that\u00a0is observed in the world today where less developed countries like\u00a0China have higher growth rates than that of more developed countries\u00a0like the US.<\/p>\n

For these reasons there is cause to look at another method through\u00a0which sustainable economic growth can ensue- social capital. Social\u00a0capital can best be described as the civic norms and engagement as\u00a0well as the trust culture, which bring about both economic and\u00a0political progress. In many empirical studies, trust is often used as\u00a0the major proxy for social capital. Political scientist Francis\u00a0Fukuyama argues that:\u00a0\u201c\u2026.. one of the most important lessons we can learn from an\u00a0examination of economic life is that a nation\u2019s well-being, as well as\u00a0its ability to compete, is conditioned by a single, pervasive cultural\u00a0characteristic: the level of trust inherent in the society.\u201d<\/p>\n

Trust can be defined as the belief that others will not deliberately\u00a0or knowingly do us harm if they can avoid it, and will look after our\u00a0interests, if it is possible. Putnam describes trust, as well as\u00a0other forms of social capital, as a means to solve the dilemmas of\u00a0collective action and cooperation, which is necessary for economic\u00a0and political progress. He argues that the reason why nations are\u00a0seemingly backward is not due to ignorance or irrationality, as to\u00a0the benefit of cooperation facilitating economic growth, but rather\u00a0due to a lack of trust; individual entities are afraid that once they\u00a0stake their investments as a contribution to collective action, other\u00a0parties involved would default on responsibilities. Fostering social\u00a0capital in an economy has the effect of reducing transaction costs\u00a0such as cost of monitoring, which impede on the ability for businesses\u00a0to take shape and thrive, which in turn feeds into the macro economy.\u00a0Robert Putnam argues that trust, which is a form of contract, begets\u00a0collective action, which helps the society progress politically,\u00a0economically, and socially.<\/p>\n

Italy, in the 1950\u2019s, was a natural experiment highlighting the\u00a0benefits of trust. In northern Italy, where there was more trust,\u00a0Putnam was able to establish a correlation between collective action\u00a0and eco-nomic progress. Hence, there was more development and greater\u00a0income was earned when compared to southern Italy, Merzzogiorno,\u00a0which had very little trust to guide public and private\u00a0relationships. This was due to the kind of institutions imbibed in
\nthe region. Fractionalization in the form of trade restrictions, as\u00a0well as a surge in mafia and brigandage units wrecking havoc through\u00a0violence and corruption, fed into the way the citizens of\u00a0Merzzog-iorno formed their trust expectations.<\/p>\n

Just as was the case in southern Italy, Nigeria has a significant\u00a0trust deficit driven by a highly fractured ethno linguistic\u00a0population profile. In a 1997 cross-country study of market\u00a0economies, Knack and Keefer recorded an extremely low percentage of\u00a0respondents who said, “most people can be trusted” in Nigeria. This\u00a0means roughly 78% of the population is distrustful. Now, given\u00a0Nigeria\u2019s present condition following a decline in oil prices (and\u00a0hence oil revenue), a weakened naira, and a decline in foreign\u00a0exchange reserves, policy makers are looking for ways to encourage\u00a0collective action and kick start the economy with increased business\u00a0activities. However, in a society where there is a lack of trust from\u00a0the individual unit to the government and institutional units, this\u00a0is close to impossible.<\/p>\n

Given the various positives that trust introduces to economies, such\u00a0as: reductions in transaction costs, innovation, physical and human\u00a0capital accumulation, and higher returns to both physical and human\u00a0capital, policy in Nigeria should be constructed in such a way that a\u00a0trusting culture is developed. Hence, in the sphere of governance,\u00a0state and federal governments should strive to be increasingly\u00a0transparent with their policies as well as communicate effectively\u00a0what these policies entail to the masses. This would foster a trusting\u00a0relationship between government and the citizens of Nigeria. More\u00a0programs like the National Youth Service Corps (NYSC), which\u00a0ultimately strive to break down barriers of culture and religion, in\u00a0order to foster tolerance amongst the youths, should also be\u00a0encouraged as this ultimately builds trust.<\/p>\n

Investing in outreach programs to enable indigenes of Nigeria to\u00a0better understand one another could be another step towards\u00a0understanding and tolerance. Encouraging a significant portion of the\u00a0ethnic groups in Nigeria to engage in and take certain seats in\u00a0government and public sector institutions would help pacify dis-dain\u00a0towards certain tribes that consistently hold power, thereby fostering\u00a0trust in government and institutions. The current gov ernment is more\u00a0focused on its anti-corruption war and hence can be rather myopic when\u00a0it comes to certain theories and policies. Taking social capital\u00a0accumulation as a matter of precedence is unlikely to occur in the\u00a0short term or even the medium term but it would be well worth the\u00a0investment.<\/p>\n","protected":false},"excerpt":{"rendered":"

In this time of economic slowdown investors may be asking them-selves if they have the appetite to stay in the market. Periods of recession or economic downturn are rife with uncertainty, dampened appetite for investments and heightened risk. The natural response in such periods may be to delay investing until conditions improve. In extreme cases, …<\/p>\n","protected":false},"author":11,"featured_media":142,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[23],"tags":[42,43,45],"coauthors":[2392,2393],"class_list":["post-74","post","type-post","status-publish","format-standard","has-post-thumbnail","","category-business","tag-fdc","tag-featured","tag-investments"],"yoast_head":"\nManaging equity investments during market downturns - FDC - National Wire<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/nationalwire.com.ng\/sub\/managing-equity-investments-during-market-downturns-fdc\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Managing equity investments during market downturns - FDC - National Wire\" \/>\n<meta property=\"og:description\" content=\"In this time of economic slowdown investors may be asking them-selves if they have the appetite to stay in the market. 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