The exchange rate has been a hot topic in recent times. Over the years, we have watched the naira fall from 300/$1 to 900/$1, causing fears and uncertainty amongst investors like you. While fluctuations are a part of the market, understanding the economic landscape helps you make better long-term decisions relating to your investments.
Since the Central Bank of Nigeria (CBN) unified the exchange rate, the naira has witnessed ups and downs based on the demand and supply of USD in the market. Last week alone, the US Dollar exchanged at an all-time high of N950/$ before it gained 15% and exchanged for N855 per USD.
Firstly, it’s essential to recognise that exchange rate movements are often short-term and should not necessarily prompt hasty decisions. When exchange rates start fluctuating, the fear of potential losses or missed opportunities might prompt you to make impulsive decisions. But reacting solely to short-term fluctuations can undermine the original investment strategy and lead to missed long-term gains.
However, if you’re concerned that the fluctuating exchange rates might lead to a loss in the value of your FX investments, that’s not the case. Here’s why: The Nigerian economy is currently facing challenges in the form of recessionary shocks and slow growth. The inflation rate remains high, standing at over 22%, leading to a rapid decrease in the value of the naira compared to the dollar.
Moreover, the country’s oil production is still below 2 million barrels per day, which limits the ability of the Central Bank of Nigeria to inject more dollars into the market. On top of that, Nigeria’s imports consistently surpass exports. While foreign portfolio investments (FPIs) are currently low, there’s a strong belief that they will increase in the next few quarters. This belief is driven by the ongoing liberalisation of the FX regime and the appealing nature of Nigerian stocks at a low cost. Unless these fundamental factors change significantly, you do not need to worry.
As an investor, it is important to differentiate between short-term price movements and the fundamental value of your investments. The intrinsic worth of an investment, its earnings potential, and growth prospects are the primary factors that should drive your investment decisions, not the exchange rate.
Exchange rate fluctuations may impact the value of your investments in the short run. However, they often have limited influence on the company’s underlying health and potential for long-term growth.
As such, the end goal of investing is to achieve long-term financial growth by investing in assets that have the potential to increase in value over time.
See how Amazon has performed over the years. In the history of Amazon, it has suffered as much as an 80% price decline, many 30% declines, and too many 10% declines. Yet even someone who invested in it just at the beginning of this year would have raked in a whopping 55.66% YTD by now.
With this knowledge, here’s our simple advice, borrowed from Charlie Munger, “Never interrupt compounding.”
When investing, the most important metric is your compound annual growth rate (CAGR), your return over your entire holding period (2, 5, 10, 20, or more years). The return you make in any given year is great, but because the money is still invested, you need to ensure that you allow it to continue to grow.
How can you interrupt compounding?
You interrupt compounding when you stop investing on schedule or liquidate your investment for fear of the unknown. Whatever your investing schedule is, stick to it or improve it. Never interrupt it by stopping it. And whatever may happen in the market, don’t fret. Don’t stop investing out of emotion. It is the nature of the market that you experience volatility in the exchange rate; it’s part of what you signed up for. Trust that you are safe with Risevest; we will help you navigate it.
So learn to ignore the noise because there will be a lot of it, but focus on ensuring you do not interrupt compounding.