Edwin Dande is a managing partner and CEO at Cytonn Investments. Prior to founding the investment firm, he worked for Bank of America Merril Lynch in New York, Centum Investment Company Limited, British-American Asset Managers Limited, and Lehman brothers.
He shares tips on how to grow your money:
You are a scared-cat
The only thing that differentiates saving and investing is the risk an investor is willing to take, which in turn determines the returns you get.
A common rule in investing is that the greater the risk, the higher the returns and vice versa. Saving is done by people who are not willing to take any risk and therefore decide to put away part of their disposable income for future use.
Between saving and investing, none is better than the other really, it just depends on your risk appetite and financial objectives. Saving is meant for people who want to play it safe.
However, as Reid Hoffman puts it, "Ironically, in a changing world, playing it safe is one of the riskiest things you can do."
Now, that does not mean you go doing stupid things like buying land for which you may never get a title for, it means investing in well researched opportunities.
You have the 'crowd' mentality
The first step in investment is to either educate yourself or pair up with a competent financial advisor in the investment industry so as to get yourself conversant with the available investment opportunities and current trends in the market.
They say that ignorance is a voluntary misfortune; you can't afford to say statements like "I wish I knew." A key mistake to avoid here is following the crowd - investing where everybody else seems to be investing.
It is advisable to maintain a relationship with a good financial advisor who understands your risk profile and your investment needs. Having said that, you probably won't avoid making mistakes. I lost a lot of money early in my career trying to do it myself.
These days I only invest with trusted financial services experts, who will only make their money after I have made my money.
Picking a trusted financial advisor is extremely hard, because most are just short-term, self-interested people out to make money out of you.
You are waiting for the windfall
There is nothing like a small or big income. You have to take your income and put away a portion for investing first, and then consume the balance.
So your consumption should be defined by your income minus some investment. Of course there shall be some times when you cannot invest, but let that be an exception rather than norm.
The first two years after founding Cytonn, the founders had no income at all, so we could not invest at all.
But the long-term goal is to invest now, so that you can grow your wealth to enhance your financial security and to take care of your needs in the long-term without working too hard later in life.
Too much too soon
One of the most common mistakes people make while trying to grow their money is being impatient. Like most things in life, growing money takes time.
There is no easy money. You have to put in the blood, sweat and tears over a sustained period of time.
If you try to make money too quickly, it is almost guaranteed that you will either end up being unethical or you will lose money. You have to earn it, be patient and disciplined.
You jump the gun
Another common mistake we make is being dishonest with ourselves. This is how you end up investing in areas that you don't understand, as it happened with the quail craze or the many pyramid schemes.
For me it does not matter how good the investment is. If I don't understand it in detail –how the investment makes money and I can't point out the key risks, I prefer to keep my money in the bank. If you don't understand the investment, rely on a trusted professional otherwise you are gambling.
You are too focused on the end game
People also err by being too focused on the promise of returns, rather than the risk of capital loss. We should always be more worried about how much we could lose, not how much we can make.
You hate to sweat
You have to take a very long-term view; most people who have made money the right way made it over the very long-term. Don't take short-cuts, put in the blood, sweat and tears.
You are too happy to get that loan
The only way to tell if your debt is good is if you can comfortably make the regular repayments from your investment returns.
If returns from the investment are not sufficient to cater for repayments when they fall due, then your debt is just a liability like your house rent.
Before getting into debt, one should have done enough research on the target investment and rates in the market to ensure you get the best rates, and have a clear investment plan that is well executed to generate returns.
As long as the return on what you are deploying the debt to is significantly higher than that cost of debt, then you take as much of the debt as you can.
That is why at Cytonn we offer our private clients a high yield return of 18 per cent, which is our cost of capital, fully knowing that we are deploying it into real estate to earn a target of 25 per cent.
You don't utilise the power of compounding interest
Compounding interest simply means that interest earned from the initial investment over the first period of investing, is summed with the principal in the subsequent period and interest is earned on this gross amount, subsequently leading to higher returns.
Key point to note is that benefits of compounding interest can only be reaped if both the principal and earned interest is left to accumulate in the account.
An effective way to reap full benefits of compounding interest is start saving early for your retirement as it will allow you to increase your account balance as well as provide sufficient earnings to make new investments.
You don't have a rock solid plan
Growing wealth is a journey, which requires patience. There are mistakes to be made along the way as well as lessons to learn from them.
Key thing is to have a plan from which you should not deviate. Of course you can tweak it when necessary, but you stick to the long-term goal of investing.