Investing 101 and spotting scams

Before we go far I would like to make sense of these two words that most people confuse: savings and investing. At its most basic, saving is the act of putting money away in a safe place to use it in the future. Investing involves putting your money into investments – such as shares, funds and property – with the hope that your money will grow. If you’re trying to accumulate a smaller amount for a short-term goal, then a Savings account is probably the way to go. Alternatively, if you’re trying to save for a large, long-term goal like retirement, an investment account is more in line with your needs.

In this article, we will unlearn and learn about investing and the process to go about it. I would like you to take a moment to comprehend these four questions: i) have you injected money in any investment before or now ii) what was it iii) what was the experience and iv) has any of your investments collapsed. Investing simply put is your money making more money for you and all these investments have both risks and returns. To understand it further there are three key characteristics of investments: i) expected return;  this is the gain you expect to obtain on your investment. Ii) liquidity; the ability to easily convert an investment to cash. Iii) risk; the possibility that you will earn a lower return on your investment than expected or lose some or all of it.

Kenya has been and continues to be home to many scams and Ponzi schemes. @surambaya handle on twitter gave a comprehensive count of the same (Read Here). Victims of scams always ask these questions; How did I not know? Why did I not listen to my gut feeling? We shall take some time, in the end, to learn how to spot an investment scam. When investing the following are critical steps you need to go through to ensure you are taking up the right plan that will help you achieve your objectives:

Step 1: Determine your investment goal

Your goal can range from buying a car, building a home, raising capital for a business, retirement planning, raising college funding etc. Before you invest a single shilling, it's helpful to figure out exactly why you're investing. Here's how to start: Grab a piece of paper and list all of the things that you want to do in your life, focusing on those big moments that come with a price tag. Use time frames to help organize your goals and plans.

Working with a trusted financial advisor and not a salesperson is always recommended for those new to investing. Expected returns and market volatility can vary, depending upon the specific investments chosen in each portfolio.

Daniel Mainye

Step 2: Understand your investor profile

There are three key types of investors. i) a conservative investor- this is a risk-averse investor. He/she prefers lower returns with known risks rather than higher returns with unknown risks ii) moderate investor- this can take moderate risk. He/she is willing to accept periods of moderate market volatility in exchange for the possibility of receiving returns that outpace inflation. Most investors tend to fall into the moderate category, which means they want to achieve good returns but are not comfortable taking high levels of market risk iii) Aggressive investor---a risk-taker. He/she works with longer time horizons and a high level of risk tolerance

It is important to understand that there is no such thing as a truly risk-free investment but that different investments carry different types of risk and you don’t have to take on just one profile. You can decide to diversify your risk in all three profiles. The saying don’t put all your eggs in one basket rings a bell.

Step 3: Understand your investment objectives

Each investor can determine an appropriate mix of investment opportunities. But you need to spend the appropriate amount of time and effort in finding, studying, and selecting the opportunities that match your objectives. The key objectives include i) liquidity and safety e.g. cash, fixed deposit accounts. Ii) Incremental income e.g. dividends iii) capital growth and appreciation e.g. parcel of lands or iv) capital preservation e.g. plots.

Step 4: Determine your investment horizon

  1. Short term: 1 to 5 years, suitable for conservative investors.
  2. Medium-term: 6 to 10yrs suitable for moderate investors.
  3. Long term: above 10yrs suitable for aggressive investors.

Step 5 and Last: Determine your investment choices based on the information from the earlier steps

Description

Conservative Investor

Moderate Investor

Aggressive Investor

Investment Horizon

1-5 Yrs.

6-10 Yrs.

Above 10 yrs.

Risk Tolerance

Low

Medium

High

Rate of Returns

Low

Medium

High

Risk Exposure

Low

Medium

High

Liquidity Needed

High

Medium

Low

Investment Objective

Liquidity, Safety

Incremental Income and Capital Preservation

Capital Appreciation and Growth

Choices

·      Fixed Deposit Accounts

·      Money Market Funds

·      Government Bonds

·      Rental Houses

·      Cash

 

·      Balance Mutual Funds

·      Real estate and Properties

·      Investment Cooperatives

·      Agriculture (Farming)

 

·      Stocks /shares

·      Equity Fund

·      Land

·      Business---matatu business

·      Private Placement Ventures

·      Off-plan investments

Avoid scams by i) verifying all information you are given especially real estate. Visit the projects and see for yourself ii) don’t chase after quick riches. Be sceptical of investment pitches that guarantee spectacular returns iii) ignore the “everyone is doing it story” iv) refused to be rushed to decide. A legitimate investment will still be there tomorrow and v) arm yourself with information. This is key to be able to pick out lies.

Keep in mind that all investors are different. Even if you fall into one of the investor profile, your financial situation may differ from that of others. Working with a trusted financial advisor and not a salesperson is always recommended for those new to investing. Expected returns and market volatility can vary, depending upon the specific investments chosen in each portfolio.

Photo by Thought Catalog on Unsplash

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