This winter we are excited to introduce you to our winter intern, Armani J. Nieves. Armani is a freshman at Bryant University and is majoring in finance. He first became interested in the world of finance in middle school when he started purchasing stocks. Armani envisions himself working with people to support them in achieving their financial goals when he receives his undergraduate degree.
The following post is written by Armani Nieves:
Inflation, poverty, starvation are words that are synonymous with the economic situation in Venezuela. In addition, investment, growth, diversification are words that are almost synonymous with the economic situation in Saudi Arabia. How can two countries, in a world of overall growth and prosperity, vary so much? It all stems from asset diversification.
In 1970, the price of oil skyrocketed and increased to $120 a barrel. As a result, this caused Venezuela to become the richest country in Latin America. Venezuelans lived lavish lifestyles and enjoyed earning high wages. However, when oil decreased in in the 1980s, inflation rose 80% in this country. The temporary adjustment to this problem was to cut government spending as well as open financial markets. Although this supported an increase of GDP from -8.2% to 4.4%, employee wages continued to remain low while unemployment remained high. This was only a warning of the dangers when countries predominantly invested in oil.
In the summer of 2014, a strong US dollar and higher output of oil resulted in the price of oil decreasing. Now, Venezuela experiences inflation like never before. In 2016, Venezuela experienced a 2,000% inflation. Although the price of oil is steadily rising, it will take a long time for Venezuela to recover as a result.
On the other hand, Saudi Arabia has undergone a massive initiative to get its country’s economy not to rely on oil. Saudi Arabia started this initiative after observing how dependency on oil may negatively impact a country’s economy. Saudi Arabia is diversifying its investments from oil to real estate, technology, and startup companies. Furthermore, they have been developing new solar farms. Research labs have been created in the King Abdulaziz city of Sciences and Technology to study and improve solar technology. They have invested over $50 billion into producing wind and solar projects by the year 2023. Saudi Arabia is pushing to become a global player in the renewable energy market.
From examples provided with both Venezuela and Saudi Arabia, we learn the lesson of not “putting all our eggs in one basket”. Venezuela put predominantly their “eggs in one basket” cited for oil. However, when oil lost its value, this country lost a lot of its financial resources. On the other hand, Saudi Arabia placed their “eggs in various baskets.” So, when oil prices lower again in the future, Saudi Arabia will be ready and may continue to profit in other manners. As a result, it is important that we do not put all of our financial resources into one stock. For example, if we place all our financial resources into the technology or healthcare sector we could be taking on a significant risk. If healthcare were to have a bad year, your portfolio could be negatively impacted. It is always important to invest in different sectors. The example of Venezuela and Saudi Arabia can serve as a good reminder of the importance of diversification – not just at the individual level, but at all levels of investment (including government investments).