Lessons From Coronavirus On The Need To Diversify Investments

Published by Categorised in: Lessons From Coronavirus On The Need To Diversify Investments

Even without visiting hard statistics about investment preferences for urban Ugandans, it is easy to tell that real estate and landed property are prized within our society. Social discussions and common peer to peer advisories, about utilisation of earnings, loans and savings, tell the whole story. In some instances, people do not mind acquiring such properties, even if the properties will lie idle for some time without generating income for owners. For the average young corporate in Uganda, it can be perceived as lack of focus to not own at least a small parcel of ground within the urban residential areas, especially around Kampala and Wakiso. This applies even when the said properties, especially acquired as empty plots of land, come rather pricy.

As such, a good number of Ugandans have a good amount of capital locked up in unutilised land, in sizes enough for residential houses but certainly untenable for any other purpose such as agriculture. This love for residential plots and construction is good but it has led to many people over investing in this sector, sometimes without much else invested elsewhere. This possibly explains, as an example, why many an average Ugandan corporate person is unaware of the goings on, on the Uganda Securities Exchange. The advantage that land offers a low risk investment option, since instances of it depreciating are remote, is quite attractive. However, since it is a go-to preference for many, the prices of plots of land end up being costly, in relative terms. As such, the payback period for residential units can be so long because the cost of rent in Uganda is relatively low.

In ordinary times, one can choose to invest in a preferred sector and not engage in others, and still achieve their objectives. It is called investment concentration. It can also be highly risky to the extent that if anything happens to the lone sector selected, the invested person may easily get crippled. It is thus possible to have a big balance sheet, and at the same time face deep cash-flow problems due to investment concentration. Although one can diversify investments and still suffer the same fate, the likelihood of that happening is much less.

As an example, at the onset of the coronavirus crisis and related lockdown, land lords were immediately under a form of moral pressure to slow down on demanding rent from their tenants. This was a logical trend, given that a number of people no longer had their routine earnings since the job market had taken a hit. I also got the impression that it was assumed that land lords were relatively well off individuals, to the extent that they could manage to live through the crisis even if their rental income did not come through. It is however possible that there are people whose income is all coming from rent, who would therefore be unable to earn anything else if rental income ground to a halt. With the love for landed and rental property indicated above, it is actually possible to have many individuals in that dilemma. One could own several rental properties and nearly no other investment. With moral pressure to ease demand on tenants to pay on time, such a person could be financially distressed, although they are rich and have made good investment with their finances over the years.

While rental business is used as an example, this dilemma above can hit anyone, depending on the prevailing circumstances. Running with concentrated investments is simply risky. A single event can distort the good fortunes of someone whose income sources are concentrated, more easily than the single event can put down someone whose income streams are diversified.

It is good to have a spread of investments that includes different items, from a sectoral perspective. It is also better to consider things such as geographical location factors, as people expand their investment portfolios. Even for the same business, it is for example riskier to own one’s rental properties within a radius of a few kilometers compared for example to owning some in Kampala and others in Mbale. Since one can diversify in regard to the technology they deploy to do the same business in different set-ups, they may as well diversify in terms of strategic relationships with suppliers and other strategic partners. During the coronavirus crisis, the latter has been resounded by the damage that the world took due to China being a major center of production of many consumables and other items for most of the world.

Raymond can be contacted on rmugisha@afriaccent.com

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