I will be publishing a series of articles over the next few weeks on investment and personal wealth management, with a hope to provide general knowledge about the world of investment and assist you to plan the future you want financially secure.
I have 10 years of experience in finance and banking, and currently am a financial and investment advisor for Steppe Group and a real estate developer. I have studied finance and accounting for my undergrad in the U.S. and have an MBA degree from Imperial College London.
Investment and you
We grow up being taught to save. Someone gave you cash for your birthday present? You save it. People put money on your Christmas tree? You save it. Government gives a cash handout? You save it. However, what we don’t often hear is to invest. Hopefully by the end of this article, you will at least consider investing that excess funds instead of blindly transferring it to your savings account.
There are two ways one can earn income; one is to earn salary by working for someone else or earn profit by working for yourself, i.e. by being an entrepreneur or a business owner. The other way to earn income is to become an investor and let your money work for you.
For a sound personal finance management, one should have an emergency savings to cover necessity expenses for 3–6 months, a “rainy day” fund, that should be placed as a bank deposit or money market fund. The rest of one’s personal networth, monetary amount of all your holdings minus your debt, should be invested in various asset classes according to various metrics, such as investment goal, time horizon, risk tolerance or appetite, and age.
Importance of diversification
However, there is one golden rule that applies regardless of different variables.
“Do not put all of your eggs in a single basket”.
The logic is simple. If you drop or lose that basket for whatever reason, you will lose 100% of your eggs. In other words, it is agreed that one should not have all of his/her personal networth in a single basket, i.e. one type of asset class. Instead, it is highly recommended that one should diversify, i.e. invest in multiple asset classes, his/her networth.
For example, if you keep all of your funds in a bank deposit at “Bank ABC”, all of your eggs are in the “Bank ABC” basket. If you keep all of your funds in multiple banks, your eggs are in the “Banking Sector” basket. If you own stocks on the MSE (Mongolian Stock Exchange) and have deposits at 2–3 banks, your eggs are in the “Mongolian economy” basket. Thus, it is essential that you diversify your funds across different asset classes, economic sectors and geographic regions.
While there are countless methods of investment management, including, but not limited to, active vs. passive, value vs. growth, fundamental vs. technical, you can be assured that the person employing one of these methods doesn’t have all of his/her eggs in a single basket. Since each one of these methods merits a lengthy discussion, I’ll leave you with further readings should you be interested to learn more.
Current investment environment
Due to the emergence of novel coronavirus and COVID-19 pandemic, the global economy has faced unprecedented challenges and unknowns. National economies virtually everywhere faced sharp slowdown due to quarantines and while it took some time, the respective governments and central banks started responding with fiscal stimulus and ultra loose monetary policy, respectively. The IMF estimated that developed countries’ combined fiscal and monetary stimulus sums up to be as high as 20% of their respective GDP’s in some cases.
What this means in layman’s term is that governments and central banks of most countries will be printing and supplying vast of money into their economies; in some cases equal ⅕ of their economies. While not an economist, I can see that there is going to be a lot more money available for the same goods and services (since government and central banks can’t create businesses overnight, like they can with stimulus packages) and it will inevitably result in inflation. Inflation means the prices of goods and services will increase and your purchasing power will decrease. For example, if you could buy your weekly grocery for X amount before, most likely after the stimulus packages, you will have to pay more than X amount to purchase the same items.
As for Mongolia, you might have heard or read about some of the stimulus packages, both fiscal and monetary, some of which are yet to be implemented. For example: 6% mortgage, cash handout to children each month, universal one-time cash handout of ₮300k to each adults, the ₮10 trillion program. I think you already know by now where I’m going with this.
Let’s look at couple of graphs before we conclude:
The broader money supply (M2) has increased by 19.6% in February 2021 in comparison to the same period last year:
Meanwhile, the official foreign currency reserve has increased by 3.2% during the same period. For an import dependent economy like Mongolia, the above mentioned stimulus packages will increase the money supply significantly while FX reserve growth remains subdued. In short, the goods and services you purchase are about to become more expensive and your purchasing power is going to be diminished.
So how will you safeguard your financial security during these uncertain times?
That will be one of the main topics of my next article.
Have a wonderful day and see you again next time!
Blogger: Steppe Group financial and investment advisor