What Should You Consider When Investing?
Investing is the act of purchasing an asset with the hope that it will generate income or appreciate in value in the future. However, this term is often (and somewhat incorrectly) used interchangeably with “saving”. Saving typically precedes investing and is simply the act of putting aside funds to purchase an asset at a future date (or to cover one in the event of an emergency). Both of these actions are very important in financial planning. However, saving alone is not enough and as individuals seek to generate value in future, investing in one way or another is key to ensuring that that a higher return is generated commensurate with the amount of risk that one is able to stomach. Saving offers low returns as it is also a low risk activity. Investing funds offer one higher returns but with higher risks.
Trading/ speculating can also be seen as a very short term form of investing but the time horizon of trading differs with that of investing and also carries a higher amount of risk. 2020 saw a significant increase in interest in trading by individuals which is often propelled by headlines that draw the wider public to get involved in markets that they may not fully appreciate or understand (such as the ongoing Bitcoin and cryptocurrency mania). However, proper knowledge and having sufficient information is paramount to sound investing. Trading plays a part in overall market efficiency but is best left to professionals.
Why Now?
The decision to save and invest has never been more important. The uncertainties that were brought on by 2020 and Covid have highlighted the need to put funds aside to sustain people and their dependents. We are also of the opinion that, particularly for people living abroad, there’s a likelihood that there will be an increase in remittances from the diaspora for investing. We aren’t yet out of the woods with Covid but the lessons have been far reaching. Sudden job losses, significant pay cuts and increasing healthcare needs associated with what we have seen over the last year have highlighted the key role that investing plays in securing one’s future.
Some of the considerations that anyone looking to invest should take into account are touched on briefly below:
- Available Capital
The amount of money that one has available to invest is a major consideration in determining what would suit their goals. A large lump sum can be easily and effectively distributed across several investments. However, for people who have smaller amounts, professionally managed collective investments could be a way to start investing while accumulating capital. Such investment vehicles are also well suited for people who wish to make additions to their investments on a regular basis.
2. Duration/ Term of Investment
A person’s investment horizon also plays a part in selecting what to invest in as well as the kind of return that one can expect over the long term. Some assets, over the long term, consistently outperform others. One’s age is also part of this consideration as younger people tend to have a longer time to earn and as such, can (and should) invest for longer durations.
3. Adequate Diversification
Diversification is essentially investing across different asset classes and sectors in order to enhance return and reduce the risk associated with any particular investment. As has been taught and is still repeated to date, you shouldn’t put all your eggs in one basket. If all your investments are held in, say, real estate in one country, then your portfolio will be susceptible to all shocks that affect that sector in that country.
4. Liquidity
Liquidity of an asset refers to how quickly that asset can be converted into cash. For instance, a small plot of land outside a prime area could appear ideal as a way to get started in investing in property. However, if the owner needs to sell this asset along the way (fully or partially), the process could take months. This is quite the opposite of financial assets such as listed stocks and bonds which can be sold and cash received within a few days. Liquidity is also a factor to consider when selecting which country or market to invest in as more developed markets tend to be more liquid than developing markets.
This list is not exhaustive but serves as a basic guide to anyone who is considering making any investments especially in this time of uncertainty. The decision to invest at a time like now is a sound one, but one must ensure that this is well thought out and as many factors as possible are considered in order to mitigate or minimize risk.
More so, for people living abroad, the need to ensure that they have built up a sum of assets back home by the time they return plays a fundamental role in securing their futures. As we build the Tulix App, the needs of our customers are at the centre of how we develop solutions for their future.
