The future starts here

October 29, 2008
Shares

, NAIROBI, October 29 – At some point in one’s life, there comes the need and urge to invest for the future. It could be through the capital markets or a business which one hopes will one day yield good results. But according to investment analysts, though many of us think about investing, many do not secure their financial future in the right way.

According to Perminus Wainaina, an investment analyst at Concept Advisory Services, it is important for one to figure out their goals. When you first start thinking about this, it seems nebulous as it is often hard to tangibly state what your goals are, especially if you’re young and single. However, you often find that once you get married, it feels like a flood of goals hit you at once – buying a house, raising children, and so on.

To get started, it is important to list every financial goal that one has in life. For example, what are you saving for? What would you like to be saving for? Other issues that might wind up on this list are retirement, children’s education, down payment for a house, complete debt freedom, a car and probably capital to start a business.

Secondly, rank the above by importance (to you and your spouse). Mr Wainaina notes that younger people tend to undervalue the importance of retirement but it comes out as an important aspect as you grow older. Figure out the time frame for those top goals.

“Everyone’s life changes over time and your goals may, in fact, change. The point is that your investment decisions are led by your goals, so before you even start investing, you should have a good grasp on what your goals are,” Mr Wainaina explains.

While thinking of investing, consider your risk tolerance. Mr Wainaina notes that a major piece of the puzzle that people don’t address before they start investing is this. Often, many people overestimate their risk tolerance, and then find themselves in an investment situation that leaves them feeling very nervous about their financial position.

It is important to spend some time thinking about the above. “Would you not worry if you woke up and found out that you had lost 5 percent of your investment if you knew in the long run it would build up in value?” The reason this is important is that it is extremely dangerous to invest in excess of one’s risk tolerance.

As a general rule of thumb, if one feels nervous about losing money at all, then probably you should not invest in stocks. Keep it in cash, in either your bank account or in certificates of deposit.

On the other hand, most people have some degree of risk tolerance, though, and if you find that losing 10 percent or so won’t make you scared and ready to pull out, then you should dip your toes into stock investment.

For short term goals (less than two years or so), keep the money in cash. That means store it in a savings account or perhaps fixed deposit account at a bank – whichever option gets you the best interest rate and enables you to have cash in hand on the day you need it.

Mr Wainaina notes that keeping it in cash means that it won’t be exposed to the up and down nature of the stock market. Quite often, over short term periods like two years, it’s quite possible that not only will you not return a profit, but you might actually lose a piece of your invested money.

For medium term goals (two to ten years), diversify at your comfort level. If your investment window is more than two years, the odds that you’ll come out ahead on the stock market start to get better, but it still comes with some risk. The stock market is never a guarantee, and past performance is never a guarantee of future returns.

For long term goals (ten years or more), stocks are a pretty good place to put your money. Over the history of the stock market, almost every period longer than ten years has seen a profitable return in a broad stock investment. Even better, during many ten year stretches, the returns are quite impressive and because of that (even though past performance isn’t a guarantee of future returns), it generally makes sense to put long term money heavily in the stock market.

Mr Wainaina adds that the best place for first-time stock investors to put their money is in a unit trust. This is because the fund allows you to be invested in a lot of stocks at the same time. That way, you’re not affected by the ups and downs of a single company. Secondly, a low cost fund means that the investing house isn’t eating much of your money. Look for a fund with a cost less than 2 percent. That way, the gains go into your pocket, not in the pocket of your investing house.

Shares

Latest Articles

Stock Market

Most Viewed