Nairalogue with Ifeoma Adeoye: Understanding Returns

A person may derive satisfaction and personal fulfilment from an investment or business endeavour but the primary aim of any business or investment is to make gains and maximise returns. The return on your investment is the percentage change in value of the investment over a given period of time. Basically, it is the total income from the investment minus all the expenses incurred in the process of generating the income.

Understanding returns is important as it simplifies your investment decision making process. When you understand returns, you start to understand the concept of “the time value of money – Money today is worth more than the same amount of money tomorrow” and the “opportunity cost of money – what I may be losing by holding or spending this money today”.

A typical savings account in Nigeria yields about 3-4% per annum, depending on the bank and all other things being equal. This means that if you deposit N1,000,000 in a savings account and you do not withdraw the money during the course of the year, you would receive a N35,000 (assuming 3.5% return) return on your money. Great right?

Let us assume that you are a trader and you purchase a product at N100 and sell it at N1,000. You incur an additional N300 in expenses from transportation cost, utility bills, wages etc. Your total cost will be N400 per unit (as we are assuming there is only one product and no taxes), hence your return would be 60%. Great right?

Basically, there is always a return to be made, however small it may be, by just doing something extra, whether it is by deliberately putting your money in a savings account or actively investing it. The higher the risk inherent in an investment, the higher the return. Notice the return from the savings account is “small”. This is because a savings account is considered relatively risk free (unless the bank goes under, your money is pretty safe). Other investments may yield higher returns but they may be more risky.

Before you embark on any investment, you must understand your risk appetite and know your investment goals and objectives. Take caution when investing your money and endeavor to thoroughly understand the nature of the investment before you invest your money. It is always safer to diversify your investment portfolio (basically do not put all your eggs in one basket. Invest in different asset types and classes to manage your risk, so that if something goes wrong with one investment, the gains from your other investments or assets would compensate for your loss and you would not be in a bad financial state)

There are other “relatively riskless” investment products that may offer up to 12% returns per annum. Speak to your financial adviser to find out more about them.

When it comes to finances, ask, ask, and ask questions! What you do not know, you do not know. It is your responsibility to find out all that is potentially available to you and take advantage of them.

So let us get out there and start thinking and speaking “returns”

Remember, start now, start small – just do it!

Photo Credit: Dreamstime | Hongqi Zhang (aka Michael Zhang)