How the big boys play

While investment is not for the faint-hearted, anyone can succeed in it. Stella Chepng’eno (pictured), a personal financial consultant and corporate trainer explains a few fundamentals that you should have at your finger tips.

1.  Develop a detailed investment plan

It will help you to eliminate the urge to buy or sell investments without careful thought. Some people buy shares today and tomorrow they want to sell them. Write your plan down and set dates to review it periodically. Establishing a plan will help you in good and bad times and will help you know where you are. With a plan, you will keep checking, for instance, if you bought shares, how they are moving. Are they going up or down? What decision should you make at that particular time? It also helps you scrutinise the wild tips that you get from people. When you have a plan it helps you ask yourself where such things fit in your plan, if at all. Keep reviewing it and checking if you are on track.

2.  Include the core components of a good investment plan

Your plan should contain:

a) Your financial goals and the time frame. For instance, you want to save X amount of money within X number of years. It will help you know the amount of time you need to be able to meet your goals and any income needs you will have from investing. With a clear plan,you will be able to know what returns your investments will be giving you on average, and what you will need to keep going.

b) The types of investments that fit your goals.

c) Your plan for diversification: Where will you start? What will be your next step? There are people who start by just accumulating, then after that they put some money for instance in real estate. Someone else may go into business first.

d) The risk you are comfortable taking to achieve your financial goals.

3. Start immediately to benefit from compound interest

Avoid delays. When you start immediately, you take advantage of time and compounding interest. When you start early you can start with small amounts which you can start increasing as time goes by. You have to first create the saving habit. Once you learn to live without Sh1,000, you can learn to live without Sh2,000, then Sh3,000. Start where you are as there is no amount of money that is small. When you get money, save first then spend. Most people do the opposite by spending then saving what is left over. If you can deduct it from the source, the better. If you are a salaried person, you can deduct it before you receive your salary, through a check off system. If you are in business you can do a standing order. It gets to the account and is picked, so what remains is your money.

Compound interest is basically the eighth wonder of the world. When you put in money and it earns interest of say, 10 percent, the interest that you earn is re-invested. The more you re-invest, the more you get. For instance, if you decide today to save Sh2,000 consistently for the next 20 years, if the interest is at 10 per cent, you will have saved sh480,000. If you compound it, you will get another Sh706,000 as interest. So if you are in a Sacco, don’t eat your dividends. Re-invest it and you will see your money grow fast.

4. Diversify your portfolio

Don’t put all your eggs in one basket. This will help you with risk management. It ensures that if something adverse happens in one sector, it will not affect you 100 per cent. If you had invested in stocks and the stocks went down, then you will be safe. You can mix it up by making some baskets high risk and others low risk investments depending on your risk appetite, meaning how much risk you are willing to take on. This also depends on your age, as there are risks that you cannot take when you are too old and there are risks that are best taken when you are young.

5. Simplify your investing

Avoid holding too many accounts with too many institutions. It is time consuming and won’t let you get a clear picture of your total portfolio. If you have about five to six companies that you have invested your money in, it can be so diversified that it becomes difficult to keep track. Minimise it to three places where you can keep your money and then with time you can grow to other places. You can do two or three products in one institution and then diversify to another area.  This doesn’t mean you should not diversify your portfolio.

Diversifying your portfolio means don’t just do stock market, for instance. Do real estate, Sacco, pension plan and so forth. Simplifying your investment means not having too many accounts with too many institutions. For example, investing in five insurance companies offering almost the same thing. For instance, if you have children, you should not have education policies in every institution. Simplifying your investments will also put you in a better position to negotiate. For instance, you can go a to a company and tell them, “I have brought you sh50 million. Can you give me a good rate?” But if you have put the sh50 million in different institutions, your bargaining power gets lost.

6. Be realistic

Investing is not just about seeking the highest possible returns. Consider investment decisions that will help you accomplish your financial goals. Make sure that you have set your investment objectives: “What do I want to achieve in the next five years?” You have to be realistic. People who say that places like money markets have low returns usually end up not investing anywhere because they are not realistic. They usually want figures that really don’t work, unless through Ponzi schemes and other scams that promise unrealistic returns. Be patient when you invest. Investments take time to grow and to give you a return. You have to ensure that you don’t keep removing it.

7.  Do your research

Avoid trusting people blindly. Think for yourself and research the expertise of anyone offering advice before you follow it. If someone tells you to invest in money markets, for instance, do your research and find out: Is money markets the best investment in the market? Or is the company that they are advising you to invest in the best in the market? Is it the company that is giving you the best returns? Don’t rely on experts 100 per cent. Also, by the time an expert comes to you, if you have done your homework, you will be very clear on which area you want to invest in. You will be able to listen to what the expert is telling you and compare notes. If the expert comes with information you do not have, you can listen, go research and then compare notes at the next meeting.

8. Keep your costs low

Before you invest, you need to know how much a company is charging you as management fee, for instance. Investment costs can eat into your investment portfolio. How much is your adviser charging you, for instance? Look for the lowest cost products that fit your needs.