My Journey from Naira to Dollar Denominated Investment.

Caveat: The post below is not a financial advise. I am not a certified or trained financial adviser. This is just a log of my own experience with investing.

My Journey started some years back when I decided that the Nigerian currency, The Naira was just too volatile and unstable. It lost over 66% of it's value in the last 7 years. This got me to convert my savings to dollars and store it in a dollar savings account I opened a while back. The idea was to hedge my savings against Naira devaluation (which happens at an average rate of 6% annually) and inflation. The goal is; as the naira slides downwards, the value of my savings (in dollars) remain as it was when I converted them to dollars.

Sometimes last year, it occurred to me that, putting my money in dollars alone is not enough. I needed to do more here is why.

My money is in the Nigerian Banking system and still vulnerable to the Nigerian economy and the fortune of the naira. I am one CBN regulation away from losing all my savings.
I am not taking advantage of the time value of money in that, at a 0 interest savings account, my money was not yielding any interest. I am limiting the power of my money working for me. aka money making money for me.

Wealth comes through investing not (just) savings

Dollar Denominated Investment
Sometimes last year, I started looking at dollar denominated investment I could put my money into. The idea was, rather than blindly save my money. I would instead invest in a dollar asset that yields interest and allow my money to grow (rather than lay dormant - doing nothing ... for me)

Here were the investments I looked at and my opinion on them.

Nigeria Eurobond - Dollar Mutual Fund
The Nigerian Eurobond is debt of the Nigerian government denominated in dollars. Essentially dollar debt of the Nigeria government. Investing in Eurobond is essentially buying Nigeria government debt and hoping to be paid back (with interest).

Dollar Mutual Funds are fund you give to an investment house for them to use for investing (in dollar denominated assets) on your behalf. I am lumping the two different together because they are the major options offered by Nigerian Financial services -Investment banks and Fintech Companies. Characteristics of this type of Investment include:

Most investment banks require very strict KYC to be onboarded (Passport, Proof of Address, the whole deal)
The opening balance for such investment is usually $1000 with $500 top up sometimes the initial is held for 180 days before you are allowed to withdraw.
Average annual interest is usually around 7%

  • I decided against going this route for the following reason:** It does not isolate me from Nigeria. Eurobond is a bet on the Nigerian economy and Nigeria's government ability to grow the economy and pay their debt. (Nigeria has never defaulted on it's debt in like ever) As oil continue to loose value and relevance in the world today, Nigeria's revenue starts to dwindling. Our debt to revenue is hitting the red. Add to the increasingly unstable regulatory landscape. The more my money is isolated from Nigeria, the better (for me)

  • The expense ratio of these investments are usually very high (relative to alternative). This particularly applies to the Dollar Mutual funds offered by Nigeria's investment banks and some fintech companies. Expense ratio is the money you pay to an investment bank for managing your funds. Most of them charge an annual fee of 1.5% of your asset value. This means if your asset with them is $1000 you would be charged about 15 dollars. Keep in mind that some of this investment grow at an average of 7% annually (in a good year) . So you are essentially taking all the risk (with your money) and losing about 20% - 40% of your potential annual interest to the investment bank. Note that the ER is deducted even if your money yields negative interest (aka when your portfolio losses money)

*** Even if I wanted to, this type of funds are very difficult** to fund especially if you decide to go with SEC regulated Investment Banks. You you are required to fund your investment account through a dollar transfer from an dollar account with your name. The catch here is that CBN has banned transfer between local DORM accounts in Nigeria. Even if that ban was not in place, you are not allowed to transfer dollars which was funded to your dollar account through cash. The wahala is just not worth the bother.

It should be noted that some fintech companies offer an easier way to dollar mutual funds in Nigeria. My fear is that virtually all of them are operating on the grey area of regulation. Most (I don't know any) are not SEC regulated directly but act as proxy for other SEC regulated investment banks. I just was not too comfortable with that arrangement.

US - Global Equity Market:

This was the path I took. Investing in the US and global equity markets gives me exposure to the best performing stock market in the world (The US Stock market) and at the same time exposure to markets in top countries like China, Germany, India including Nigeria so in essence I have a geographical diversified investment portfolio.
Type of Investment Assets
Real Estate, Equity Market, Bonds, Crypto Currency and Commodities (Gold, Silver) etc are some of the assets you can invest in. For me I decided to go for Equity and Bonds. Exposure to the US - Global real estate market can be gained through real estate investment trusts (REITS). The asset I chose to go with were ultimately guided by the relationship between risk and rewards. In investment (as with life) the higher the reward, the higher the risk. Assets that offer high rewards, also come with great risk, and Assets with very little risk often come with little reward.
Portfolio Balance
To achieve some form of balance, I decided to go with a Stock - Bond Portfolio. The stock are the driving force for growth while the bonds brings some balance and safety. I went with this combination because Bonds and Equity are sometimes negatively correlated. This means when equity is doing badly, bonds tend to do better.

How asset is balanced depends on many factors like age, income stability, etc. If I were in my 20s, my strategy would be F.I.R.E (Financial Independence Retire Early) and this would mean 100% stocks portfolio. Alas, my portfolio is balanced at a 70% equities and 30% Bonds.

When calculating risk, I factored in age (how long I have to work) career (how lucrative is my career or how easy is it to switch jobs), pension fund, and fixed assets like Real Estate.

How I invest

The options for investing in the equity - bond markets are to actively invest or invest passively. The former require me picking stocks or having a professional do it for me aka an Active Mutual Fund

Or do I take more passive simple approach. Day trading was out of the question for me because I am just not qualified nor do I have the appetite to do such things. It is a full time job that requires years of training and experience and you have to pure over Company reports and read financial statements and even all that does not guaranty you would beat the market long term. The second option of putting my money in an actively managed fund where professionals decide what best to do with my money is also not an option because;

Cost (Read the part on expense ratio above)
because 9 out of 10 times the market usually out performs even the best active fund managers over a long term

I decided to take a boring but long term approach to investment. This means rather than day trading or picking stocks to try and beat the market, I decided to instead track the market by investing in Index funds and Exchange Traded Funds (ETF). Index / ETF (I use both interchangeably) are funds that basically tracks market index.

Take the Vanguard S&P 500 (VOO) which is a fund that tracks the top 500 companies in the US stock exchange. Each company is ranked based on their weight. The weight is based on company's capitalization (basically how big they are) This means if I buy a 1000 dollar worth of VOO etf, 6% of that $1000 would be used in buying Apple stocks because Apple capitalization make up 6% of the company listed in the S&P 500. An index fund follows an index of stocks and blindly invest in that index. S&P 500 is an index but there are lots more index. Like the Emerging Market Index Which tracks top companies in developing worlds like MTN, Alibaba etc or the Total US market Index, which invests in all the companies in the US stock market.

“Don't look for the needle in the haystack. Just buy the haystack!” - John C Bogle

The advantage of an index funds include:

  • Performance; Index funds always always out perform stock picking or actively managed mutual funds over a long period using historical records that go back as far as 70 years.

  • Cost; Index funds are very cheap, while actively managed mutual funds can have an expense ratio as high as 1.5 - 2%, index funds expense ratio are sometimes as low as 0.007% that is essentially $7 on a $10,000 investment

  • Diversification; They provide a well diversified portfolio. The composition of an index fund includes companies in financial, tech, logistics, health care etc

  • Cheap entry into the markets: Index funds are often available as ETFs which makes them very cheap to buy. Some can be bought for as low as $100 (with fractional trading) and boom for $100 you own a slice of the top 500 companies in the US or a slice of all the companies that make up the US stock exchange

Investment Vehicle

Having decided the Type of Assets to invest, the next question is. How. How do I go about acquiring these assets. How can I buy US / Global equities or index. Luckily as a Nigerian, they are a number of options and I would list the ones I considered below, my views on their pros and cons.

Nigeria Fintech Companies:
There are quite a number of Fintech companies in Nigeria that provide access to the US / Global equity market. They usually do this by riding on the Infrastructure of a US based Broker. Almost everyone of them for example uses Drive Wealth

Drive Wealth is a US clearing house brokerage company that allows 3rd party companies uses it Brokerage infrastructure for access to the US equity market. Many Nigerian Fintech companies use drivewealth infra to sell US stocks. They provide KYC for drivewealth and drivewealth gives them access to use it's infrastructure for a fee.

Pro:

  • It is very easy and convenience to sign up to Fintech companies that ride on drivewealth infrastructure. The KYC is standard (Regulated ID, Proof of address, BVN etc)

  • Easy to fund your investment because most of this fintech company allow you to buy dollars via their platform with naira, so you can use you bank transfer or naira debit card to fund your portfolio (The dollar rate they would charge you are usually 5 naira higher than black market rates)

  • The stocks or assets you buy are actually owned by you and even if the fintech company go belly up, your stocks are safe and you are allowed to transfer to another broker if you want

  • Although most of this fintech companies fall outside of Nigeria's regulatory frame work. Drivewealth, the actual investment broker you are dealing with is well regulated in the US. They are regulated by the US Security and Exchange Commission, and are also Members of the US Financial Industry Regulatory Authority (FINRA) and Securities Investor Protection Corporation (SPIC) this means that your money is safe and covered by insurance of up to $250,000

  • Con

  • High Investment Cost: Most of the fintech companies that allows access to US market charge commission on trade (buying and selling) that are between 1 - 1.5% of the amount to be traded. This means if I want to buy a stock for 1000 dollars, I would be charged 15 dollars commission. This is ok especially if you are not day trading. But for me it is quite expensive, especially compared to the alternative offered by other companies

  • It is also quite expensive if you decide to fund your account from a dollar savings account. They charge 2.9% on dollar debit cards and although you can transfer to their US account directly from your bank for free, the transfer process itself would cost you a flat fee of about $50+.

  • Regulatory Gray Area: The Nigeria regulatory space is so unstable added to the fact that most of this companies are already operating in a gray area (without SEC registration) I would prefer not to work with a Nigerian company altogether. Yes my money with them is safe cause it is actually covered by insurance through SPIC still..

  • US Estate and Withholding Tax The major issue that made me not consider them is that, any stock or asset you buy through Drive wealth (which most of them use as brokerage clearing house) is subject to US tax laws one of which says that the US withholds a 30% withholding tax on every dividend payable to your portfolio from a US company. They will also confiscate up to 40% of any asset you have in your portfolio that is over $60,000 should you die while holding such assets.

International Brokerage Firm

I considered 2 International Brokerage firm; Passfolio and Trading 212. Although Passfolio is a US based Brokerage company. They also use Drivewealth as a clearing house which means they essentially offer same service as similar Nigerian based fintech. The exception here is they have super fast on-boarding and KYC. They need just your BVN and boom, you are in. In any case Passfolio shares same pros and cons as Nigerian fintech stated above.

Trading 212:
Is a UK based Brokerage house that trades in the London Stock Exchange. I decided to go with them for the follow reasons:

They well regulated by the UK Financial Conduct Authority, FCA
They are covered by Financial Services Compensation Scheme, FSCS; In this case, investors will be able to claim under the Financial Services Compensation Scheme (FSCS), which can pay up to £85 000 to each investor
They offer commission free trading
They offer some of the cheapest way to fund your account. I use google pay (the only option available to Nigerians) with my dollar debit card and I get charged 0.07%. That is $7 for every $1000 transfer. This is way cheaper than the alternative (by a lot)
It offers me better tax coverage by allowing me take advantage of Ireland income and estate tax agreement with the US and thus avoiding the draconian tax US impose on non citizen residence like me. - I do this by buying US index funds domiciled in Ireland.
They offer some of the best features for investing like, they allow you build your portfolio pie and fund the pie, they offer free portfolio balancing and many more cool features for free.

Trading 212 cons include:
On boarding and KYC can be a hassle. You need a valid passport and a proof of address (I used electronic bank statement)
Although almost all the major US equities are also traded in the London Stock exchange, You are still limited in the numbers of index funds available.

Investment Strategy

Investment duration
I am in for the long term (15-20 years). The longer you are in the market, the more gain you make.

Lump sum or Drip Investing:
This is a big question every first time investor ask. so I have a huge amount of cash how do I invest. Do are just throw it all in at once (what if I do and market crashes months after) or do I wait for market to price correct or even crash and buy stocks on the cheap.
It is important to note one thing. You can never ever time the market so don't even waste your time trying. Stats based on historical records are overwhelmingly in favor of throwing it all in at once. 70% of the time you would be better off in the end especially if you are investing long term. The idea is time in the market is better than timing the market.

However we are creatures sometimes driven more by fear than by stats and logic so the mid way is to Dollar Cost Average.

Dollar Cost Average; is part of my investment strategy. The idea is, rather than throw all my money in at once, I gradually ease it in say rather than put in $20,000 at once, I can put the money in over a period of say 1 year by investing $2000 every month. This means over the 10 month investment period if the prices of a stock is high when I am about to invest, I buy less of it for $2000 and if the price is low, I buy more of the same stock.

It also means I leave money on the table during a bulls run. It all depends on your tolerance for risk. I choose DCA over a short period if I had a lump sum to invest. The truth is, most people would DCA anyway because for many of us, our investment funds come from our income which comes at fixed interval.

My Investment Portfolio

My Investment Portfolio are made up entirely of Vanguard ETF. I went with Vanguard because they started the Index fund revolution. It is structured like an NGO and thus holders of their funds are also the company share holders and they are not structured for profits. This makes their expense ratio the lowest in the industry. I targeted their Ireland domiciled ETFs to take advantage of tax incentives, basically I avoided the US estate Tax and also reduce withholding tax on dividends from US companies to 15% instead of 30%.

Tune out the Noise
I don't follow rave of the moment or sudden hype of a particular stocks or asset like crypto. I completely disregard hype and distractions and stay focus to the course. Investing long term means, I am less interested in short term market crashes or high prices because I intend to ride the wave through.

**All said and done. My Portfolio is comprised of 4 holdings
**

40% Vanguard S&P 500 UCITS ETF USD (VUSA): This is the UK version of the Vanguard S&P 500 tracker. This index gives me exposure to the top US companies

30% FTSE All-World UCITS ETF (VWRD): It replicates the FTSE All-World Index which is made up of companies in the developed and emerging markets. across Europe, North America, Asia, Middle East and Africa.

15% EUR Eurozone Government Bond UCITS ETF (VETY) This represent the safe side of my portfolio. It is meant to give it some stability. It basically tracks Government Bonds issued by EU countries. EU is the most stable region of the world and also the most wealthy.

15% Global Aggregate Bond UCITS ETF USD Hedged (VAGU) This ETF follows Government bonds mostly developed countries around the world with some well rated emerging markets.

The above represents my investment journey so far. I am by no means an expert and I am still earning the ropes. This does is not an investment advise. I have no affliction whatsoever with any of the company mentioned in this post

[Update: Mar 10, 2021Update: Mar 10, 2021
I have since made some adjustment to my portfolio essencially collapsing from a 4 to a 2 fund porfolio. The reasons and the new allocation are explained in this blog post.

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