No one invests to lose money. Investment is a gamble to make money – really good cash – but which, unfortunately, comes with uncertainty about gain or loss. That’s what those who handle our money call risk.
For those who dream of making piles of cash, a word of caution: the higher the return, the higher the risk. That, of course, is no licence to risk everything.
Most of us are no better than the village farmer who plants and waits for the rains and expect a bumper harvest. We always follow what our friends and neighbours are doing, and chamas are all the rage among women. Clearly, there’s lots of cash floating around, but not a single risk-free investment.
Whether you have millions or just thousands, there are rules that have stood the test of time. Savvy investors have been glad they never ignored any one of them. You too can get smart by making them your guide.
Go against the grain: Don’t be swayed by the majority. The world of money knows no democracy. The crowd tends to get whipped into frenzy, while smart investors buy based on their positive expectations. The theory of contrary opinion says, “The crowd will always be wrong.” Because of human nature, we’ll always try to ape what seems to be working well for others.
Make it your action to buy into an investment when everyone is gloomy and sell when they are happy. American billionare investor Warren Buffet advises investors to always “watch the tide but not the waves.” He has followed this contrarian principle and he’s the world’s third richest man.
Look for the under-appreciated opportunities. If you want to buy land in Nairobi, don’t rush to Kitengela, where everyone is stampeding to. Look for ignored areas with potential. In stocks keep an eye on companies with low investor expectations. Low expectations are easier to beat.
Invest, invest and invest: If you wait for the perfect opportunity, you’ll never get anything done, said a great philosopher. Most of us ‘plan’ to start saving when we get that long awaited promotion. However, spending habits are like a lion’s cabs. As they grow up, they change from suckling to taking meat of prey hunted down by their parents.
The more we earn, the more the craving to move to a better house, get a flashier phone or latest car model. Keep in mind that the longer you wait to start saving, the more you’ll have to save later in life to meet your financial goals.
Follow a plan: Your investing strategy ought to be dictated by your profile. If you are in your twenties to late thirties, you are better off flirting with high-risk investments like stocks.
Since you are saving in the long haul, equities offer higher returns than bonds and at this age you have the time advantage. Although they are more volatile, you have plenty of time to level the bumps. As you move into your mid-forties, shift towards low-risk investments like bonds, land and fixed deposit accounts, which are less volatile and good for your falling tolerance for risk.
Avoid greed. It kills: A few years back investors broke their feet to join pyramid schemes, veiled as investment clubs. None seemed to have paid heed to the saying that when the deal is too good, think twice. Schemes were offering to double your principal after a month. Everyone danced, but when the music stopped, most of them could not get seats. The dreams of high returns went up in smoke with the principal amounts. Yes high return comes with high risk, but then it’s not wise to see a high risk and fail to walk away from it.
Review your investment: At the beginning of every year, spend time to check your investments. You can use a financial planner if you have one. Be sure that the asset allocation you reflects your needs and tolerance to risk. Even if you are still comfortable with your overall plan, you might need to do some tweaking – this simply means restoring balance by trimming poor performers.
Use expert advice: There are many ‘analysts’ and ‘financial advisers’ these days. Always seek help from people with the right qualifications and experience. Any investment adviser should either be a Certified or Chartered Financial Analyst or pursuing the qualifications or a Certified Financial Planner.
Cut your losses and run: It is important to stop the bleeding once it becomes apparent that you have chosen a loser. Most of us hold on to loser investments hoping that it will someday pull itself together. The compelling reason to sell losers is the concept of opportunity cost. Often, the opportunity cost of holding a losing stock, for example, is far greater than the loss on the stock itself.
The bottomline is, if an investment is not paying off, dump it.
Luke Mulunda is a media consultant and editor of the Nairobi Business Monthly.
email: [email protected]