Essential rules for new investors

The investing landscape can be extremely volatile – and changes year after year, but there is a lot to be said for investing in what you really know and understand. Considering the enormous number of products on offer and the nature of the industry, it is not that simple; but it can certainly be done. First, we will take a look at the potential difficulties in understanding investments, and then we’ll look at how new investors can invest safely, suitably and sensibly.

How Much Do We Really Understand?

One could argue that the only asset that is fully understandable is cash in the bank, or some form of fixed deposit. Here, you know exactly how much you will earn and that you will get your capital back. The problem is that you will be lucky to beat inflation, and simply leaving your money in cash is not the answer; it is just not a productive investment.

Moving a bit up the risk ladder, we get to bonds. Given the variety of bonds and bond funds, understanding what you get is also not necessarily that simple. Government bonds are fairly straightforward, but again they don’t pay much. To really earn anything, you need a variety of bonds; probably some corporate ones plus, arguably, some foreign ones. Yet, these start to become more complex and risky depending on various factors relating to the issuing company or country. Likewise, bond funds may depend on a number of managerial and financial issues.

The same applies to stocks, mutual funds and so on. Even real estate funds have proven to be less reliable and straightforward than many people might think. Direct real estate purchases are more understandable in one sense – what you see is what you get. But then again, there can be unknowns relating to the market; taxation, the location, disclosure by the seller and so on.

Similarly, alternative investments, like hedge funds, can be extremely complex. Infrastructure, too, is without doubt a great idea in principle, but the nitty-gritty of investing in it is not such a sure thing. No matter how sound the principle of a particular investment, there is almost always someone or something out there that can make it go wrong.

How Can We Invest Sensibly, Suitably and Simply?

The above section certainly implies that we really know very little about a lot of asset classes and investments. Nonetheless, there are many ways of ensuring that you are investing in what you know. One can really invest in a straightforward manner, and understand what one is doing.

Many veteran investors have simple diversified portfolios, and look more at asset allocation. Spending hours performing regression analysis is not an option for many part-time investors. A really straightforward mix of these funds is therefore transparent, cheap and does as good (or better) a job as more complex and expensive vehicles. Despite the above, to be fair, there are a lot of good managed funds out there. With a bit of effort, you can find reliable and understandable equity and bond funds with which you can relax.

A good piece of advice is to start searching through financial magazines and publications on investments to start with simple investments, and then expand and extend as you learn more. Specifically, mutual funds or exchange-traded funds are a good way to get going, and one can then move on to individual stocks, real estate – and, further down the line, even a sensible amount into resources or hedge funds.

Some Investment Options Currently Available in Ghana

For the purpose of this article, the various investment options will be classified into three main groups based on the time horizon of the investors.

The three main groups of investment options available in Ghana are short-term, medium-term and long-term instruments. The decision to invest in short-, medium- or long-term is dependent on an investor’s risk profile – return expectation, the amount of money available, age of the investor and frequency of withdrawal.

Type  Duration  Institutions.

Short-term

   
Treasury bills 91-days, 182-days, 1-Year Commercial and Investment Banks
Debentures 30-days, 45-days, 60-days Investment Banks
Savings and Fixed Deposit One Week to 360 days Commercial Banks /Investment Banks
Foreign Currency One Week to 360 days Investment Banks

Medium-term

   
Government of Ghana Index-Linked Bonds  

3 Years

Government of Ghana
Listed Shares Medium- and Long-term Ghana Stock Exchange

Long-term

   
Private Equity 5-20 years Investment Banks e.g. Omega Capital
Property 10-20  years Investment Banks

 

Conclusions

The more you learn the better. But above and beyond this, you can (and probably should) avoid investments that you do not even understand in principle.

Furthermore, go on sound recommendations. If your friends have been investing for the past 20 years in some mixed fund that has served them well, there is a probability that it will continue to do so – even though past performance does not necessarily guarantee future results. On the other hand, if you get a phone call from someone who you met in a pub last week and who wants to give you a hot tip as a ‘big favour’, be more sceptical.

Likewise, there are many independent investment advisors around who get paid only for their time and not on commission. Their job is to understand what they recommend, without the pressure of having to sell to earn a commission. Also, make sure you diversify; not only into asset classes, but possibly into different investment banks and fund managers. Always bear in mind that too many bits and pieces also create complexity, which can lead to errors.

 

ABOUT OMEGA CAPITAL

Omega Capital Limited is an Investment management, private equity and   investment advisory firm. The Company is authorised and regulated by the Securities and Exchange Commission of Ghana.

Contact Us

Analysts:

Kumapremereh Nketiah (JP)

Sophia Obeng- Aboagye

 

Omega Capital Research

No. 23, Kanda Estates,

The Albert’s, 1st Floor,

Sunyani Avenue

P.O.Box, CT8818

Cantonments – Accra

T: [+233 302] 201-538

F: [+233 302] 201-539

 

Email: nana.nketiah@omegacapital.com.gh

 

Website: www.omegacapital.com.gh

 

Disclaimer

Additional information is available upon request. Information has been obtained from sources believed to be reliable but Omega Capital Limited (“Omega Capital” or “The Firm”) does not warrant its completeness, accuracy or veracity. The firm is licenced and regulated by the Securities and Exchange Commission of Ghana (SEC). This material is for information purposes only and it is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and estimates herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information.