“ Know what you own, and know why you own it.”
Most people who know my love for all things investment and financial planning will often come to me with these questions. “What should I invest in?” or “where should I put my money?” Another classic is “which share/stock should I buy?” My answer is always consistent, “it depends” It depends on your investment strategy.
An investment strategy depends on:
1. The risk appetite of the investor;
Do you like experimenting with different investments? Would the mantra high-risk, high return describe what gets your juices going? Then chances are you are a risk-taker and have a high-risk appetite. Conversely, if you shy away from new investment vehicles and like to stick to the tried and tested investments, then you are better off investing in low-risk traditional instruments.
2. The purpose of the investment;
You could be investing to receive a regular income in which case a rental property and treasury bonds may fit into this. If your approach is two-pronged i.e., investing and borrowing then saving in a SACCO would most likely be your choice.
3. The time frame of the investment;
The longer the investment period the easier it is to recover from a setback and so it may be worth investing in “riskier” investment vehicles. Where you have a short investment period e.g. an emergency fund or you are close to retirement then it is advisable to invest in the lower risk investment as you need to preserve your capital as much as possible.
4. The availability of funds;
Are you only able to save small amounts at a time? It would then be wise to save up those small amounts of money until you can acquire a higher ticket asset. This works well for example if you wanted to purchase real estate, you would most likely accumulate the small monthly amounts until you have enough to have a deposit or to make an outright purchase.
5. The availability of information on an investment opportunity;
You cannot invest in an opportunity you do not know exists. My encouragement is to research widely on what opportunities exist around, even if they are out of your reach for now. Fortunes may change and down the line, you could find yourself with the money that is needed to advantage of an opportunity you had researched earlier on.
A good investment strategy will:
a) Look at your current life circumstances i.e, how much can you afford to save right now. Start where you are, by making a financial plan, with what you have. .
b) Take care of essentials and security needs first i.e., start with building an emergency fund, take out the necessary insurance. Make a budget that gets the basics of investments right.
c) Give room for growth, both in the amount put into the investment and in the return on investment. When you scale up you should enjoy both increase in the portfolio and the return on investment. Think of it as part of retirement planning.
So, let’s get into what kind of investments are available for us;
1. Low-Risk Investments;
These are investments that are suitable for a risk-averse investor. The return on this investment will be relatively low compared to other investment vehicles that have a higher risk.
a) Savings accounts;
Commercial banks provide this investment vehicle. Some allow you to link your normal checking/current account with a saving account. The interest rate on saving account is usually very low. On the upside, you can access your money easily. Savings accounts are good for accumulating emergency fund .
b) Fixed deposit accounts;
This is an account that allows you to invest a specific amount over a pre-determined period; usually short -term between 3 months to a year. Over the ‘fixed’ the money cannot be accessed by the investor. However, if the money is required urgently then there are penalties for withdrawing the funds before maturity. While it is a good way to invest, the limited liquidity and low- interest are a disadvantage.
The Government from time to time will borrow from the economy to meet its budgetary shortfalls. This will be in the form of short-term treasury bills or longer-term treasury bonds. The interest rate on treasury bonds is usually higher than that offered by commercial banks. It also provides a good income source as the interest for the treasury bonds is paid bi-annually. The downside is the lack of flexibility in getting back the invested amount especially if you are a small bondholder and have an emergency. You may have to sell the bill or bond at a heavy discount.
d) Money Market fund;
A fund is an investment vehicle in which investors pool their monies and give to an investment fund manager. In a money market fund, the fund manager usually invests in a cocktail of fairly liquid instruments such as commercial papers, treasury bills, and bonds, bank deposits among others. Investing in a money market fund has the advantage of flexibility, you can withdraw your investment within short notice while getting a good interest rate. The investment funds are regulated by the Capital Market Authority, while the Fund managers are licensed by the same Authority.
2. Medium risk investments;
The risk associated with these investments, is not as low as the low-risk investment. It is however relatively low compare to other investments.
Savings and Credit Cooperatives are usually formed by like-minded individuals to save and to extend credit to its members. A salient feature of a SACCO is that members guarantee each other for loans. On the other hand, Members are entitled; to a return on their shares and their core deposits. The rate of return is usually dependent on how well management runs the SACCO and how members repay the loans they have taken. The biggest advantage of a SACCO is that you can save while you get loans.
b) Welfare groups /Chamas;
Chamas are less formal SACCOs. Fewer individuals form the groups compared to SACCOs albeit with a common goal. They work well, especially where members are disciplined and focused. Disciplined in giving their timely contribution and in their discussions in meetings and focused on their goal. Most welfare groups don’t do much because members are not aligned with the group’s vision and goal. It is also possible to lose your contribution where the group does not have proper structures.
c) Balanced Funds;
In this fund, the investment fund manager invests the pooled fund in both high-risk and low-risk investments, to balance the total risk. Part of the high-risk investments includes Equities. While the low-risk ones could be the bank deposits, Treasury bills, and bonds
3. Aggressive investments;
These investments are ideal for those who have a higher than average risk appetite.
These are units of ownership in publicly traded companies. In Kenya, equities are traded at the Nairobi Securities Exchange. The unit of ownership in a company is a stock. It is possible to purchase the stock directly as an individual through a stockbroker or an equity fund managed by a fund manager. Investing as an individual will require
Equities are quite volatile as their prices are market-determined. Because their return on investment is not predictable, they are considered high-risk investments. Due to their volatile nature, personal financial advisors will usually recommend investing in stocks with a medium to long term view i.e., 5–10-year horizon.
Starting and establishing a business of any kind is a lesson in patience, character development, disappointment and hope all rolled into one. It is a rollercoaster ride. That is why few people are willing to venture into it. Businesses especially the new ones have no guaranteed return, however, they can be fulfilling to the owner especially when grow and become established.
c) Real estate;
Buying real estate the right way is relatively simple. When you engage the services of experts the process is smooth. Even with the experts such as lawyers, land surveyors, and valuers, it is still prudent to exercise extra caution as this investment can easily go sideways. Also, it possible to purchase land in areas where the piece of land cannot be easily utilized for long periods. The cash outlay required to develop the land may also be prohibitive, meaning you could end up with an idle asset.
4. High risk and speculative investment;
These investments are very volatile and should be held primarily for speculative purposes. They also require sophisticated investors, who understand the instruments and the markets
a) Foreign Exchange (Forex) trading;
Forex trading involves speculating on the rise and fall of a pair of internationally traded currency e.g., United States Dollar Vs British pound, Canadian Dollar Vs Japanese Yen, etc.
The trading is done in the foreign exchange market. Individuals are allowed to participate but needless to say that it is best left to sophisticated traders. This is because it is possible to wipe out your whole fortune in a matter of seconds as the market fluctuates fast. In Kenya, forex trading is regulated by the Capital Market Authority (CMA) and those who offer this service to the public have to be licensed by the CMA.
Investopedia describes a cryptocurrency as a digital currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend It is a form of digital asset based on a network that is distributed across a large number of computers.
There are many cryptocurrencies the common ones being Bitcoin, Ethereum, Litecoin among others. It is estimated there are over 2500 cryptocurrencies.
The trading is done in an exchange and is pretty similar to how Forex trading is done.
The fact that the investment is not regulated by any jurisdiction, makes it very risky and a lot of research should be done by any potential investor.
It is important to note that Crypto- trading is not regulated in Kenya and the Central Bank of Kenya issued a cautionary statement in 2015 to the public, on trading with virtual currencies.
In closing, there is an opportunity to build wealth in the various categories listed. You just need to be intentional about how you pick your investments while ensuring your circumstances permit you to have the investment as part of your portfolio, make sure you take advantage of tax planning opportunities too.
As always, I recommend engaging an expert to assist in your journey.Remember, starting today gives you the best chance of success.