I believe you are familiar with that famous Chinese proverb: the journey of a thousand miles begins with a step. Just a step. In the world of investment, the journey to financial freedom begins with the first step to plant the basic unit of a currency (a cedi) as a seed. Please note this. That One Ghana Cedi must be an amount dedicated to the investment process. What is the point in rushing to put away money in investment for a year when you need same in a day or two? The longer money is invested, the higher the likelihood for its growth.
For a successful investment journey, we must first ensure we have catered for our everyday needs as well as emergencies. Why? This is to forestall the situation where an investment is stopped because there is the need for cash for a mundane necessity. Through careful planning, we can avoid that and prime ourselves for investing.
There are some situations that help to make us ready. It is true that investing requires discipline, purposefulness and meticulousness. However, many times, our focus on the investment goal and sticking to the plan is critical to success. Nevertheless, it helps when certain conditions are in place.
Two key factors
Firstly, it is helpful to your investment journey when you have a stable source of adequate income. Imagine being suddenly out of work just when you thought you could start investing! Whatever money you have earmarked for investing would have to be spent on daily living expenses till perhaps all is used up. However, if the job and income are secure, the money set aside can be safely invested without fear of the need to break.
Secondly, having little or no debt helps in investing. If you have to keep on servicing a debt, it may be difficult or next to impossible to successfully invest. Debt may have arisen from the need to settle an unexpected financial challenge or reckless spending. Whatever it is, it is significantly beneficial to carefully plan to pay off the debt to free up money. A dwindling debt is much more attractive than one that grows or stays.
Obviously, we begin by working for the money. We engage in extra jobs that cost little to do and incur less spending on non-essentials. With diligence and sacrifice, we accumulate enough to begin with.
Are you ready?
Let us assume now that we are ready. We have little or no debt, we have an emergency fund and our income is relatively secure. How do we start making our money work for us? What do we do with our ‘piggybank stash’ of money? It is time for the money we have labored for to work for us.
Let’s start by setting our goals. What do we want to achieve? In what space of time? Are we investing for capital to start our dream business? Are we investing towards pension? Are we investing to buy a car, land or property? Or, are we investing for marriage and to start a family? Whatever the goal is, it must be realistic to avoid frustration along the way. Once we settle on what our goal is, we can decide on what to do. Starting too many things at the same time usually does not work and all could tumble down like a house of cards.
There is quite a number of things we can get into. We may split them into two broad classifications: financial instruments and entrepreneurship. Financial instruments include stocks, bonds, treasury bill, fixed deposits, derivatives, as well as the less common ones such as insurance policies, precious metals, guarantees, interests in partnerships, trusts or estates. They are mostly regulated in one way or the other and involve knowledgeable professionals who act as advisors and facilitate investing in these instruments. Entrepreneurship, on the other hand, is different. It is taking on the risks associated with running a whole venture in the hope of making profit. It may not be regulated and the gains could potentially be much higher, likewise the losses.
The safest among financial instruments are usually the ones issued by the Government through the central bank: treasury bills, treasury notes and treasury bonds. Risk is about whether the borrower will pay back on time. It is normally thought: how would the Government not be able to pay back on time? With that in mind, these instruments are sometimes referred to as being risk-free. In reality, there are times when Government may not be able to make good on its obligations but I admit it seldom happens.
Investing in treasuries is a good way of ensuring that one’s money is not ‘eaten up’ by inflation. This is usually termed ‘preservation of capital’. It is also a good way to start investing. While the interest rates are comparably low, they are usually above the rate of inflation. This is very important. No one wants to invest in a venture that results in a loss of value. Investing in treasuries ensures this.
Aside treasuries, there are quasi-Government corporate issued instruments. In Ghana, a typical example is cocoa bonds and bills. These are sold by COCOBOD, not the Central Bank, but offer probably the same security as treasury bills and bonds. This is because they are backed by the Government, just like treasury bills and bonds are.
It is usually helpful to have an insurance policy or policies, especially when starting to invest. Particularly for long-term goals like investing for pension or retirement, insurance is a sensible thing to have at the beginning. The importance of insurance diminishes, however, as the value of our investments grow.
Beyond these types of financial instruments, there are some that are less secure and offer more profit or more interest. These include mutual funds or unit trusts, bonds that are sold by companies and shares. Aside offering high interests or potentially high gains, they are also attractive because they may release cash through secondary trading or through dividend payments. These cash releases can be re-invested to allow the investment to grow even faster. Additionally, it can afford an immediate need for cash without having to break any part of the investment.
Alternative investments include investments in property (real estate, artwork), private equity/venture capital, commodities and real estate investment trusts. These are more complex, more expensive and riskier.
Before one begins investing, it is usually advisable for one to speak with an investment adviser or a financial planner. The journey could be filled with ‘landmines’ which could otherwise be avoided with expert advice, in order to safeguard hard-earned money.
It is great to start investing at an early age (20 years or younger). But for most of us, that cannot be told as our stories. But here is the good news. It is never too late to start something. What is for sure is this: the fruit beckons. Now is the time…let’s till and sow.
>>>the writer is a Senior Investment Analyst at OctaneDC Limited, a Fund Management and Investment Advisory firm based in Accra and regulated by the Securities and Exchange Commission (SEC). Prior to joining OctaneDC team, Kwadwo was a Fund Manager at Dalex Capital and has over ten years of experience in fund management and administration, portfolio management, management consulting, operations management and process improvement. You may contact him at [email protected] or +233244563530