Right now, the Naira isn’t doing well. At the start of the year, on January 1, 2023, one US dollar was worth N735. Today, it’s around N1145 for one dollar. This means the Naira has lost a lot of its value, more than 49% in less than a year.
Because of this, many people who saved money in Naira have lost a lot. To protect their money, many are using a trick called hedging.
In this article, we will explain how you can protect your Naira money by using dollar investments.
What is hedging?
Hedging is a way to protect your money so it doesn’t lose value. It’s like a money shield. You don’t do it to make more money, but to stop losing what you have.
For example, if you have some stocks that are losing value, you can use hedging to balance the loss. If your stocks go down, your hedging investments should go up, keeping your overall losses lower. This is especially good for currency like Naira, which is weak right now.
Why you shouldn’t keep all your money in one place
You’ve probably heard the saying, “Don’t put all your eggs in one basket.” It means you should spread your money around. If you only keep it in one place, like in Naira, you might have big problems if that currency drops in value.
For example, in 2022, the British Pound fell a lot. People who had all their money in Pounds lost big time. The boss of Virgin Atlantic, a big airline, talked about how his company protected itself from the falling Pound.
In Nigeria, many companies are struggling because the Naira is so weak. For example, DSTV and GoTV have had three months of losses this year because of this.
Smart people protect their money by using hedging. Let’s see how they do it.
Ways to Hedge
1. **Spread Your Money (Asset Allocation):** Let’s say Uche, who sells electronics, changes 60% of his Naira money to Dollars every two months. This way, if the Naira goes down, his Dollar money will save him.
2. **Use Contracts (Derivatives):** Options and futures are special contracts linked to other assets. They can be used to protect against losses.
3. **Buy Safe Assets (Haven Assets):** Things like the US Dollar, Gold, and Silver hold their value well. If your Naira-based money drops, these can help balance out your losses.
Good Dollar Investments
1. **Dollar Funds:** These are funds you invest in, but they are in US Dollars. Even Nigerian banks like Stanbic IBTC offer these. The cool thing is you get your returns in Dollars.
For example, if Ade put $1000 in a Stanbic IBTC dollar fund, it would be worth about $1053.9 now. Plus, since the Dollar got stronger, Ade’s $1000 is now more than it was in January.
2. **Dollar-Based ETFs:** These are like baskets of different US stocks. They are good because they let you invest in Dollars. You might need an expert to help you with this.
3. **Keep Hard Dollars:** This is like keeping physical cash in Dollars. It’s risky and can be expensive, but it’s an option if you can’t do anything else.
Risks in Hedging
Hedging isn’t perfect. Sometimes the tools you use to protect your money don’t match the losses exactly. For example, if most of your money is in Naira and only a little in Dollars, you might still lose if the Naira drops a lot.
Using hedging often involves paying experts or brokers, which can be expensive. You need to time your moves right. Knowing when to start and stop hedging is key. If you hedge too long, you might pay more in fees than you save in losses.
Remember, even though hedging can save you from big losses, it needs good timing. Investing legend Warren Buffet advises to be bold when others are scared and cautious when others are excited.
In short, smart money managers always look out for their investments. By using legal tricks like hedging, they protect their money from taking huge hits. Be like them. Think ahead and make sure your money is safe!