Be Careful Where You Invest

13 Feb    Public
Feb 13

Be Careful Where You Invest

Most enlightened people are waking up to the fact that investing is a central pillar of personal financial success. However, in order to invest, one must first have an income then save some of that income. In order to do that, you have to obey the first commandment of personal finance – Thou shall spend less than you earn. Whether you earn Shs 3,000 per month, 30,000 or 300,000, if you spend more than you earn, your circumstances will continue to get worse, if you spend all you earn, you are just treading water. The only viable road to financial independence is to save and invest part of your income, but you have to be careful where you put your money.

Once you have learnt to curb your appetites, avoid marketer’s snares and the pressure to conform from your peers, you might now have some money left that you can use to achieve long term success. Careful now, here is where most go wrong. Some try to make quick money not knowing, until too late, that the quick refers to how fast you will lose your money. Like hydra headed monsters, pyramid schemes, ponzi schemes and other investment scams spring up as soon as old ones are shut down. With the insatiable appetite Kenyans have for land, the market is ripe for land banking scams of massive scale. All these ‘Investments” often promise returns exceeding one hundred percent, well in the realm of “too good to be true”. The truth is that these schemes make a lot of money for the perpetrators and the luck few who join at the beginning, money which is defrauded from the majority who lose when, inevitably, the scheme collapses. The collapse is a foregone conclusion because these schemes are based on an unsustainable financial model.  If you really must invest in such places, make sure it is money that you can afford, really afford to lose.

Some people think investing is synonymous with starting a business. While it is true that a huge majority of the wealthy are business owners, the sad truth is that starting a small business on the side is often a risky, stressful and loss making proposition. Unless equipped with an entrepreneurial spirit, skills, viable business idea, practical business plan and financial resources, your nascent venture could end up in the overcrowded graveyard of failed businesses. While one can not make progress without taking some risks, it is important to think through and consider whether you can handle failure in business and the devastation it can cause your family. For many employed people, professionals and already established business people, the most appropriate investment option is passive financial assets and rental property.

“Financial assets” refers to treasuries bills, treasury bonds and stocks of companies quoted in the stock exchange. When one puts their money in these kinds of investments, they do not participate in the day to day management of these companies but you are entitled to dividends (if the company performs profitably).   With government securities, you earn interest on the securities. You are therefore left free to concentrate on your career or business.

However, most people find these financial assets confusing and lack the skills to invest successfully in them or assets to employ professionals to manage their portfolios. But imagine that you were able to employ the most qualified investment professionals to select and manage your investments. Imagine not having to read and understand those incomprehensible financial documents and statements that are regularly issued by public companies, yet you make good profits from these investments. I’ve good news for you – you can. You can do this by investing in the stock market through unit trusts.

Unit trusts are companies which pool money collected from many investors then invest those funds in the various opportunities available on behalf of the investors.  Regular investing through a unit is one of the most appropriate ways for the majority of individuals to enjoy the good long term returns produced by stocks and also access treasury bonds and bills without needing a lot of money. Some of the advantages of investing in this way are:

1)      The funds are managed by qualified professionals licensed and regulated by the Capital Markets Authority. They are much better placed than most to make profitable investment decisions.

2)      You can choose from a variety of accounts, one which matches your investment goal and your ability to bear risk.

3)      Your investment is immediately diversified because each account invests in many different companies.

4)      You can automate your investment by putting a monthly bank standing order. This is the best way to ensure regular investing. The worst is to hope to invest whenever you have extra money, you probably never will.

5)      Dividends and interest is automatically reinvested ensuring fast growth of your investment through the power of compounding.

6)      You have easy access to you money should you wish to have it.

With all these advantages, I would congratulate you on your wisdom if you asked where the catch is. Unit trusts publish their investment objectives and you should ensure that the one you select matches you investment goal. Actually unit trusts are a noble idea, but one which can be perverted into a profit sucking leech if you do not watch out.  Some companies offer packaged investment products that ride on the name of unit trust but are really just an investment contract that happens to invest in unit trusts. The investor’s problem is that there is a layer of charges that significantly reduces the portion of the investor’s funds that are actually invested and therefore significantly reduces the returns. If you want a unit trust, invest in one directly. With these other products or contracts, the devil is in the fees.

Copyright © Manyara Kirago, RFC® financial-counselling.com

9 Comments

  1. Thank you Manyara. This information is important. My wife was about to invest in these schemes that sale plots , then they farm it for and get paid at the end of the year. But from your article, I concur with your sentiments that first group might benefit. The group that joins the scheme later stand to loose when the scheme collapses. We saw this with the pyramid schemes. What is your advice investment on rentals without involving schemes?

  2. In deed great advice! The two most important actions would be to have the discipline to invest regularly and finding the right investment channels.

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