To invest means to allocate money into a venture with the expectation of some benefit in the future. The expected benefit in an investment is often referred to as return. Usually, investments may come in the form of ownership investments, lending investments, near cash investments, business investments, precious objects and collectibles.
Ownership investments give the holder an ownership right and when it comes to risk, they are the most volatile and yet most profitable. For instance, investments into a real estate business for rental and resale purposes. Precious objects and collectibles can also be grouped into ownership investment if the intention is to keep them for future sale and profit.
Lending investments allow an investor to lend money to a party (the issuer) who has need for it. They come in the form of government bonds, corporate bonds, and fixed deposit to an organization. The focus of this article is on financial investments that fall in the category of ownership such as stocks, near-cash investments like collective investment, mutual funds schemes and lending investments like bonds and fixed deposits.
Risk and return
Risk is the probability that an expected return would not be achieved. Return is the gain made on investment. Risk and return are highly correlated. Increased potential returns on investment usually go hand-in-hand with increased risk. In principle, the higher the risk, the higher the return. As an investor, if you are not careful about your quest for high returns, you would expose your investment to too much risk that in the long run can make you lose a portion or all of your investments.
Invest based on research not sentiments
Many people get their fingers burnt while investing because they normally invest based on sentiments and not solid research. Before investing, you need to be sure you know all about the product you are investing in, the risk associated, and be sure you are comfortable before signing up. Many people sign up for investments without knowing what they are putting their money into. It is always advisable to read a lot on the product and if you are not sure, ask for a second opinion from a professional before you proceed. If you proceed to invest in an investment based on referrals and comments from friends and the sales person, if you make losses, don’t play a victim. You ought to have known.
Choose the firm to invest with rightly
Proactive investors invest with companies they know a lot about. You only know based on information publicly available on them. There are so many things to look out for but first check if they are licensed and are in good standing with the regulator and know those behind the company. Also, look out to see if they are practicing good corporate governance, whether or not they have a professional insurance cover, a robust ICT infrastructure and the professional competence, among others.
Track your investments
I have seen a lot of passive investors in my years of practice as an investment professional. I have seen educated people who invest with a company and don’t followed up on the investment for years and only do so when they are near retirement or are hard pressed with a financial situation. The sad thing is, most of them come without any evidence that they have investments. They only refer to a staff who attended to them when they did the investment. Some even come without a receipt and can only make reference to the building, the design of the office space, or when they brought the funds for investment. For God’s sake, companies can relocate, employees can resign, retire or even die. Why should those be your point of reference?
Another disheartening situation is when the investor does not know the name of the product they invested in. Companies grow and their product portfolios increase. The onus lies on the investor’s ability to keep record of what they invest in. Do you know that after a number of years, your financial institution is permitted by law to discard some records from their archives? Do you also know that companies change software and can lose some data in the process that could potentially be yours?
Why should you track your investment?
If you put your money into any investment package, you should cultivate the habit of continuously following up on your investment to see how it is doing. This makes you an informed investor. The information you get from tracking your investment will help you decide whether to continue with the investment or cash out.
How do you do that?
It is necessary to maintain a correct address at all times. Give correct addresses when completing an investment application form. This is one of the ways of tracking your investment. This is because notices of annual general meetings and other relevant correspondence are communicated through this medium.
There are so many ways to have up-to-date information on your investments. It is your right as an investor to be informed about your investment. However, you will need to make a conscious effort to get it. The under-listed are some of the ways of getting up-to-date information on your investment.
- Annual reports: When you get the annual report, make sure you read the chairman’s and MD’s reports. Carefully scrutinize the financial statement and if you do not understand the content, please read the notes section. The notes give detailed explanations of all line items in the financial statements.
- Attend annual general meetings and ask questions: If you attend annual general meetings, you will meet the Board of Directors and other top management personnel and question them on anything you don’t understand or are unhappy about.
- Audit review and reports: Audit reports from external auditors can be a good source of information for your investment.
MISCONCEPTIONS ABOUT INVESTMENTS AND THE FACT
Investing is not gambling
Gambling is putting money at risk by betting on an uncertain outcome with the hope that you might win money. Part of the confusion between investing and gambling may stem from how some people employ investment vehicles. For example, it could be argued that buying a stock based on speculation without any research is like placing a bet at a casino. Genuine investments are not done in a sentimental and gambling manner without knowledge based on credible research. Serious investors do not just throw their funds at any random investment; they perform thorough analysis and commit capital only when there is a reasonable expectation of profit. Risk is inevitable with investments but taking calculated risks makes a lot of investment sense.
Investment is reserved only for people with excess income
Many people avoid investing with the excuse that they don’t have enough money. The truth is, nobody has enough money. If you manage your resources well, you can set aside some funds for investment. No matter how small your money is, if you invest consistently, you can build enough funds with the power of compound interest.
Only sophisticated people invest
It is normal for people to shy away from terrains that they are not knowledgeable about. The same sentiment goes for investment and that is why people shy away. Some people do not invest because they are not familiar with financial instruments and the risks associated with them. Ignorance of investment avenues and their associated risks should not prevent you from investing. Information on investments is available in text books, websites, and some financial blogs that can be accessed for free. There are also investment service providers who are willing to educate and enroll you on their investment products. Once you put your mind to it, you can get enough knowledge that will guide you to build enormous wealth.
It is too risky to invest
Various scandals by some investment houses have increased the fear of many on the safety of their funds. Evidence exists to support this fear; for instance, the credit crunch in the developed economies fueled by sustained period of careless and inappropriate financial engineering. In Ghana, the DKM, US Group of Companies, and other microfinance scandals, the revocation of licenses of some 53 Asset Management firms by the Securities and Exchange Commission have increased investment fears. Although investing can be risky, they can be managed to neutralize a significant portion of the risk element. Every investor has their level of risk-tolerance and that should inform their choice of any financial instrument. Investors with low risk-tolerance can opt for more conservative investments like fixed deposit, Government of Ghana Bills, notes and bonds, and fixed income investments from blue chip companies. A company can be referred to as blue chip when it is financially strong and has a strong name in its industry with dominant products or services.
Invest only when income level increases or when you are much older
Deciding to invest only when your income increases or when you are much older is flawed. For relatively younger workers, it is a fact that they may be saddled with commitments such as rent, payment of car loans, and mortgages. Your responsibilities do not reduce when you are getting older. Once married, you have children and the bills go up. When people are old and are nearing retirement, health issues set in and this requires money. There is always something to pay for. The secret to financial freedom is in your decision to invest irrespective of your age or responsibilities.
Investment is only reserved for business gurus
The media most often presents investors as older entrepreneurs. That is why we hear of rich entrepreneurs and investors such as Bill Gates, Warren Buffet, Aliko Dangote and the Asuma Bandas during investment news segments. This is not the whole truth. These individuals make the news but being an investor is not limited to them. On the contrary, anybody who invests with the expectation of returns is also an investor. So an investor can be young or old; famous or otherwise.
Investments are your surest bet to sustainable wealth-creation. You can create sustainable wealth by investing consistently in the right investment vehicles and tracking them accordingly to ensure that all is well with your money. To obtain the optimal returns on your investments, you need to choose investments based on your investment objectives, your risk profile, and your investment time horizon.
You need the services of investment banking firms to help you grow your money. It is essential that you choose the right investment service provider by checking to know if they are licensed by the regulator and they are in good standing, whether they practice good corporate governance, have the expertise and a robust ICT infrastructure to manage your investments. If yes, you can invest with them but keep an eye on them to ensure that they are doing the right thing.