The investment process

Our finances, cash & cashflow

Self-awareness, for many people, begins just prior to secondary school. It may be either the secondary school as it was before the nineties, or the junior and senior high as we have it currently. By then, most of us will have a fair idea of what we want to do with ourselves as we grow up. This may not have much to do with career path choices; just mundanely academic at least, like, “I shall go to senior high Z”. About this period, we begin to form objectives and view different alternatives to select.

The choice of an objective in investment comes to us all differently. For some, it is quite early. During the late nineties, the financial sector had undergone restructuring after years of the Economic Recovery Programme (ERP) and Programme of Action to Mitigate the Social Costs of Adjustment (PAMSCAD).

The Financial Sector Adjustment Programme, a World Bank programme, had helped to put the Ghanaian financial sector on a sound footing. The Ghanaian investing public had the option of buying Treasury bills. Treasury bills are short-term loans that the public gives to government in return for interest. Since they are backed by government, they are considered risk-free.

The investment process

A Graduate’s Story

Interest rates at the time were still quite high, and so was inflation. A young man took notice of the interest rates on Treasury bills and decided that was the way to go. He assiduously bought bills (91-day bills, 182-day bills) every month through the investment management firm he worked with at the time. At maturity, the investments were rolled over and the power of compounding worked wonders for him. It is instructive to note that he didn’t know that much about investing – risk profile, diversification, investment horizon and so on.

However, he saw how much money, even if in nominal terms, he could make while interest rates were still that high. He made a lot of money, for a young graduate, after six years. He was ready, financially, to make a deposit for his first home, without taking a loan from a friend or family member. The Treasury bill purchases had been in varying principal amounts as his needs could bear, but he had consistently bought them.

That was years ago, and it was when we used the old currency (when we were all cedi millionaires). Interest rates have come down significantly, but investing in Treasuries is still a very sensible way to grow funds.

It all starts with a desire to accumulate funds. There could be a specific amount or it could be open-ended, but we must have an objective to start with. We may want to build funds toward retirement, to purchase a home or inject into a business venture. We may want to build funds to enable us have money work for us to provide extra income. We may also want to have funds ready to support our wards when they are ready to enter university.

Objectives & Risk

An objective may be very specific and state a certain amount we wish or need to achieve. ‘GH¢10,000 in 5 years’ is a good example, with all the quantitative specificity. Also, ‘A new groundwater mechanised well’ is good. The objective should be audacious and challenge us without being over-burdensome. An objective can be qualitative, though without any quantified amount or timeline – like ‘Toward retirement’ or ‘For regular income’.

Along with our investment objective, it is important that we assess our propensity for risk. Risk may not be a wrong thing to take – in a calculated and well-reasoned manner. We all hope the worst of our fears do not happen. Yet, because we are aware that our fears do not always materialise, we take a risk to receive a reward. The element of reward is the ‘desirable’. The bad event we hope will not happen is the ‘undesirable’. When we go ahead to make an investment despite knowing the ‘undesirable’ may happen, we are taking a risk to receive a reward – which we term interest or a capital gain. No risk, no reward. Even doing nothing can be a risk. Yes!

We can take steps to ensure that if the ‘undesirable’ should happen, we will not be too affected. We usually do this by spreading our investments, or diversifying them. Investment assets are grouped according to their nature or behaviour. It is usually prudent to spread investments across different groups of investments, referred to as asset classes. If something bad happens to one class, causing us to lose money, it usually will not happen to another asset class. As the saying goes, ‘Don’t put all your eggs in one basket’.

Plan and Appraise

It is good to have a well-thought-out plan, but a plan means nothing unless it is implemented. Once we have determined what we want to achieve, decided on what kind of risk (or how much risk) we can take, and have decided which asset classes to invest in to achieve diversification, we ought to take the step to begin. Beginning implies buying an investment asset, like shares on the Ghana Stock Exchange (GSE), or a fixed deposit from a finance house or Treasuries.

Important, too, is getting the right documentation to cover all the investment assets we buy. All share-certificates bought and sold on the GSE are recorded on the Securities Depository in the name of the investor. All fixed deposits bought and issued must be certificated on proper letterheads and duly signed by designated officials of the borrowing institution. As investors, we must ensure these when we implement our investment plan. The right documentation is critical for payment of interests, dividends and principal amounts invested. Documentation is also vital for dispute settlement.

In the course of investing, we need to constantly appraise the investment’s performance. Many investments fall short of expectations because of unforeseen circumstances. A review of the investment will inform us whether to withdraw our money and perhaps invest in some other asset with better prospects; or whether to add more investment in the same asset.

If a fund manager is in charge of our investments on out behalf, we will receive statements on a regular basis, typically quarterly. We can have our own benchmark expectation on how our investment should fare, and we can compare the actual with our expectation.

There is no need waiting a long time to check on our investments, even if they are managed by fund managers whom we have absolute trust in. The prudent thing is to confer with our fund manager regularly to know what is topical in the investment community or markets, what opportunities or threats exist to take advantage of or avoid, or whether it is time to change our fund manager.

Aim at a Goal

Like any good plan, it should result in the achieving of our goals. We set out to reach a goal. It is diligent work, but it is not daunting. If we have been true to ourselves and chosen a not-too-daunting objective, situated our investments with the right portion of risk, and consistently reviewed our investments with corrective actions, where necessary, we should be able to breathe easily and arrive at our objectives.

On each step of the way, there are licenced fund managers to guide and help us. Investing requires good information – and not everyone has access to this. Investing often requires expertise, and we may not all have this. Licenced fund managers should come in handy. They are dedicated investment advisers and can help us to shape our objective, identify our risk profile and diversify our investment to ensure that our investment decisions are safe and sound. They can give us insights into financial markets, with a view to assisting us make informed decisions that augur well for our investments. That said, you can always call on us at OctaneDC.

When we look at a tree, we realise that it likely started as a small seed. The seed had support – good soil, moisture, sunshine, nutrients and probably pruning from a farmer. The end, what we see, may not divulge the whole story, but many things must have gone into the making of that tree. We will realise our objectives with patience, consistency and care, as a strong, grown tree.


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