We all have spending habits. But one must first earn in order to spend and this calls for wise investment.
Understanding the art of investment is usually tricky for a majority of people even when good opportunities come calling. But how one invests today determines whether he/she will end up rich or poor in the future.
According to Alpha Africa Asset Managers managing director Andia Chakava, and investment analyst Joseph Makau there are investment habits that once picked up will see your money work for you this year:
1. Have a financial goal
Many people often start saving without an end goal in mind yet that target should determine how one invests their money. These goals may be short-term, about a year, like buying new furniture.They can be medium-term, a horizon of five years or less, that could include saving enough for a mortgage down payment. Finally, they could be long-term goals — more than five years — that include a college fund for your children oreven retirement fund.
These goals should be your motivation to invest and have your money work for you.
2. Start investing now
The best time to start investing is when you feel that you can handle an investment. This is because there is never a right time to start making investments.
Sure, for some, timing for investments is important but of equal importance is starting as soon as possible. As author Timothy Ferriss succinctly put it “someday is a disease that will take your dreams to the grave with you.”
There’s really no excuse not to start investing now as there are options to invest Sh1,000 or less in the market. Living within your means and having a saving mentality releases more funds for investment.
3. Be willing to take risk
There is an element of risk on all investments as expected returns are not always guaranteed.Therefore one has to understand the risk. There are individuals who are risk averse which means that they prefer to avoid risk, those who are open to take huge risk and those in the middle ground willing to take a certain amount of risk with a certain level of expected return. As the maxim goes in investment, “the greater the risk, the greater the reward.”
4.Get professional advice
With as many financial consultants in the market, take time and analyse the options at your disposal based on a professional point of view. The financial word can be somewhat intimidating to most people. This should not deter someone from investing. Currently there are a host of professional advisors who break down most of the technically challenging aspects of investments and make it easier for you to make a good choice.
5. Be consistent
For instance, you can decide to be patient with the stocks you want to invest in no matter the state of the bourse. Sticking to one’s investment style, consistently, will always be of great benefit as one is less distracted and more focussed on their investment.
Markets are also volatile and no one can predict with certainty what will happen tomorrow. By investing consistently, a person will automatically be able to invest more when the markets are low and buy less when the markets are high.
Eventually, your average cost for investing would be lower than you trying to time the market.
6. Understand your investment
Most people don’t really understand the products they invest in, what drives their investment returns or even what affects their potential return now and in the future.
Therefore, when their investment values are down, they believe that they are being swindled yet that investment is being affected by an unforeseen or unavoidable economic event.
Understanding one’s investments would enable an individual to be patient in their investment and remain focused on their financial goals.
7. Diversification is key
As the saying goes, “don’t put all your eggs in one basket”. This rings true for investments.
Diversification enables an investor to spread risk by investing in different asset classes — securities, private equity and real estate among others.
A good strategy would be to invest in different stocks or stocks in different sectors to counter balance each other. Another approach would be to invest in fixed income, money market or equity funds (private or listed) that aggregate different securities.
One can also stagger their portfolio and diversify investments on a time basis, that is, investing in securities with different maturity periods. This reduces the risk of losing out during certain seasons.
8. Be an early adopter
Early adopters are almost always get rewarded for the risk they take. This also applies to investments especially due to the supply and demand rule, that when demand is low — when an early adopter gets in —the price is usually low.When they are patient enough and the average investor gets wise to this, increased demand will push up the prices thereby making a good return on their investment.
A good case is the recent wave of interest in quail bird farming. Early adopters who knew of the market could sell eggs at Sh100 and above and licensing from the Kenya Wildlife Service was free. When other investors picked up on the returns that could be made, they flooded the market, they could only sell an egg at Sh20 since the supply far outstripped demand.
9. Consider fees and other expenses
Fees and expenses vary between investment companies and investments. Every shilling paid for management fees or trading commissions is simply a shilling less earning potential return.
Generally, these costs are not listed on your statement and are deducted from your investment returns before returns (loss or gain) are posted to your account.
Before you invest, make sure you get full information about that investment.
10. Protect your portfolio against inflation
Inflation has everything to do with investments. If the rate of return on your investments is less than the inflation rate, the purchasing power of your money will decline over time.
As an investor, you need to develop strategies to hedge your portfolio against inflation.
Treasury bill yields are positively correlated with inflation and are therefore used to track inflation. Having Treasury bills in your portfolio gives you the advantage of liquidity and low down-side risk.On average, T-bills provide you a negative real return after tax and thus do not preserve your capital. In order to hedge against inflation, it is advisable for commercial paper to be partof your portfolio because the yields on commercial paper are 2 per cent to 3 per cent higher than Treasury bills with the same maturity therefore providing you real returns after tax thus preserving your capital.
11. Learn from your mistakes and other investor’s mistakes
Whether you are a novice investor or a seasoned veteran, there is none that can say that they have the ‘Holy Grail’ to trading and investing.
At one point we are all ‘work in progress’ and an obvious way to improve on our investing skills is to learn from our previous mistakes.
Some of the common mistakes in investing are, greed, following the heard, and laziness.
12. Be patient
Just like a seed, growing your money takes time and patience. Market swings, can do a lot to stir up emotions, spark unhelpful speculation, and lead to hasty decisions. For you to succeed, invest wisely and then have the patience to let it grow.
For example, investors who participated in Initial Public Offerings in the 1990’s and 2000’s and were not in a rush to liquidate their securities despite the cyclical nature of the market are currently laughing all the way to the bank.
13. Comply with the taxman
Tax efficiency is essential to maximising your returns. However many investors don’t understand how to manage their portfolio to minimize their tax burden. You can maximise your investment returns by exposing your portfolio to tax exempt investments like infrastructure bonds and corporate bonds.
14. Measure your performance
Always evaluate your investments against a benchmark. The benchmark not only needs to be theoretically sound, fair and achievable.
Selecting a specific benchmark is an individual’s decision, but there are some minimum standards that any benchmark under consideration should meet.
An effective one should be unambiguous and transparent, investable, priced daily and there should be availability of historical data.
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