In previous articles, we covered financial goals and strategies you can adopt to achieve them. In this article we are going to explore how to invest the savings you have made. Most people invest to help them achieve their goals. Consequently, one must have a clear and compelling purpose for investing. To have long term success in the investment game, you will require practice and mastery of two character traits more than any; sacrifice and discipline. This is part of the reason why you need a compelling reason to commit to the investment process and not be distracted along the way.
Let me illustrate with a personal story. Some years ago, not long after the N1 highway was opened, I was driving through Abekah Lapaz intending to branch to Darkuman. The driver in front of me was not moving, while the other lanes were moving very fast. This continued for 1 minute. Then I saw other drivers exiting the lane onto the fast moving lane and so I did same. When I got ahead, I discovered that lane was meant for those going straight ahead and not for those turning to the Darkuman side. Unfortunately for me, traffic lights for my new lane turned red before I could cross. Then I observed the cars in my former lane started moving. I had to wait and go all the way to Kwashieman to make a U turn. It took me 15 minutes extra because I could not wait for 1 minute and entered the wrong lane. Sounds familiar to you?
Investments are like that. If you do not discipline yourself to pursue your own goals, you will follow other people and risk missing your investment goals by several years. Just in case you are thinking I could have switched lanes like the commercial drivers do, in investments and asset allocation parlance, you cannot do so without incurring significant costs. In many cases, you can lose or lock up your entire money. What do you want to achieve with your money?
One will need to grasp the importance of assets and liabilities. Robert Kiyosaki of rich dad, poor dad, defines assets as things that bring money into your pocket and liabilities as anything that takes money out of your pocket. To meet your financial goals, you will need to accumulate assets and discard liabilities. The process of acquiring and accumulating assets is known as investment. Just think of your assets as hiring an army which will be strong enough to fight your war.
There are many financial assets to invest in with each class of assets having their own sets of returns, risk and liquidity characteristics. Experts generally classify investment objectives into three broad categories. Your investment objectives can be translated into one or a combination of these three groups below;
- Income (need periodic income e.g. interest, dividends or rent)
- Growth (want your money to grow)
- Stability also known as protection of your principal
Factors to Consider when setting your Investment Objectives
I. Time Horizon: When will you need your money back, 10, 3 years etc.? The general rule is the longer your time horizon, the more risky (and potentially profitable) investments you can make. It does not mean everyone with a long time horizon will pursue growth objective though. Other factors explained below come into play.
II. Risk Tolerance: How comfortable will you be to see the value of your investments go up 20% in one month and the next three months it drops by 15%? If you cannot sleep comfortably with that, then income or stability objectives are suitable for you, not equity or real estate. Do not then join those lanes even if they are making 150% returns, just stay with predictability.
III. Liquidity Needs: Liquidity refers to how quickly you can sell an investment for cash. Real estate can be very profitable but selling it can take years and to be able to sell it quickly, you would have to sell at a high discount. Following closely to real estate are equities listed on the Ghana Stock Exchange. If you have a job or other regular sources of income, then you can pursue aggressive growth investments than someone else who has only one source of income.
In conclusion, your circumstances with regards to the 3 factors discussed above will guide your choice of investment objectives and therefore the mix of investment vehicles (financial assets). It is important not to copy another person’s investments. Stick to your own, especially those you understand.