Given recent economic events, you may be wondering whether you should start investing, continue investing or make changes to your investment portfolio. While we cannot tell you how to manage your investment portfolio during a volatile economy, we are giving you the guidelines to make an informed decision. Prior to any investment decision, areas of importance to consider are:
- Establish a personal financial plan.
“Financial planning is like navigation. If you know where you are and where you want to go, navigation isn’t such a great problem. It’s when you don’t know the two points that it’s difficult”-
Venita VanCaspel (1983). “The power of money dynamics”, Simon & Schuster
Before you make any investment decision, you must reflect and assess your financial position, taking into consideration all your fixed income. This assessment must capture the goal you want to achieve and the amount of risk you are willing to take as a person. Making positive returns from your investment is not a guarantee; however, with reasonable assessment of your financial position, reasonable information, and facts about savings & investing and following through with a plan, you are likely to make positive returns on most occasions. Take note that part of your financial plan must include the type of investment you will prefer which usually comes with your risk appetite and current financial position; and whether you will be managing the investment yourself or if you will want it to be managed by a professional individual or entity.
- Invest in only investment products that you understand
“Never invest in a business you cannot understand”- Warren Buffet
Most individuals are familiar with investment products like treasury bills, bonds, stocks, or equities, etc. However, there are several other schemes out there with very high yields and tempting. The returns on these schemes are out of the ordinary and mostly suspicious. A well-informed investor or individual will not take the initiative to invest in such products due to the high risk associated with it. This is in line with a basic investment principle; higher risk brings higher returns. Per precedence, most of these schemes run on a concept that is very difficult to understand and often, turn out to be scams. With them, you must struggle to make any reasonable meaning from how an investment will yield a very high return in a short period of time. We recommend that you ask questions and verify the response with an independent professional, to help you understand the product or scheme. Always take your time and engage trusted colleagues and recognized entities on products you do not understand before you invest. When you have exhausted all avenues to help understand and you are still in a dilemma, DO NOT INVEST.
- The time to start investing
“If you don’t want to regret your life later, then begin to invest your time, begin to measure your life. Measure your life by the products and by the results you produce!”-
Sunday Adelaja (How To Become Great Through Time Conversion: Are you wasting time, spending time or investing time?)
The time to begin investing is now!!! There is no other time than now. One of the most powerful concepts of investment is the compounding interest which feeds on time and patience. Compounding interest puts your money to work and grows larger as it feeds on itself. The longer you keep investing, the higher your yields due to exponential growth. Waiting to start investing later is like postponing the interest you are likely to make over a period. If you put aside GHC 50 a month, it will be worth three times more if you invest at age 25 than if you wait to start investing until age 45. You might be able to invest more money in the future, but you will never be able to make up for lost time with its associated compounded interests.
- Diversify your investment portfolio
“I’ve always been a big believer in diversification for anybody. It’s never good to put all of your efforts and all of your time and all of your financial resources into just one project. Diversification is key for any individual and any business”- Paul Heyman
Diversification is a technique that mitigates risk by allocating resources across various financial instruments or investment schemes. Its main aim is to minimize losses by investing in different investment products that would each react differently to the same market conditions. Historically, the returns of the three major investment assets- Stocks, Bonds and Cash have not moved up and down at the same time. Market conditions that cause one investment asset to do well often cause another asset to have an unfavorable performance. By investing in more than one asset, you will reduce the risk of making negative returns and the overall performance of your portfolio (mix of stock, bonds and/or cash) will be fairly good if not outstanding. Example, if your portfolio is made up of stock and bond, and the returns on stock falls but bond rises, the favorable performance on bond will counteract the losses in stocks. This is usually good for investment with long term goals such as retirement.
- Take advantage of “free money” from employer
“To get rich, you have to be making money while you are asleep”- David Bailey
This scenario is mostly common with individuals in formal employment. In some employer-sponsored retirement plans, the employer will match some or all of your contributions. Let us assume your employer matches 100% of your contributions on up to 5% of your salary and you earn GHC 5,000 a year. If you contribute 4% of your annual salary which is GHC 250, your employer will add GHC 250, making your annual contribution GHC 500.
If your employer offers a retirement plan and you do not contribute enough to get your employer’s maximum match, you are likely passing up “free money”.
