 |
| Image Credit: 401(K) 2012/Flickr |
As another year draws to a close, the
New year will be the first blank page of a 365 page book. We all want to write
a good one. Don’t we?
Soon, it would be all about setting
new goals and making new resolutions; like learning a musical instrument,
making a new friend every month, starting to exercise, giving up chocolate, or
even breaking a world record. This list can go on and on, but wait a minute, be
sure not to omit a very major item on your list. In fact it should be first on
your list. It's a resolution to invest wisely in the coming year.
Mind you, according to recent
statistics, Only 8% of people are always successful in achieving their
resolutions. 19% achieve their resolutions every other year. 49% have
infrequent success. 24% NEVER succeed and have failed on
every resolution every year.
Therefore,
it's not about the lengthiness of your
resolution list but the ability to be counted as part of the 8%, giving
priority of course to what I consider the paramount item; ‘investing wisely’.
So, from me to you, this comes as the
long awaited sequel to ‘What to do when you've got more money than you need’, in other words, how to invest.
When it’s about investing, remember
that “The first rule is not to lose and The second rule is not to forget the
first rule.” – Warren Buffett.
Because risk appetites vary, the best
way to invest is to start by setting out on a journey to discover where you
stand, i.e. checking your risk appetite and then opting for investments that
suit you.
This sounds pretty straight forward,
doesn’t it? Well the next question one may ask is “now that I have assessed by
appetite; what are the options open to me?”.
To answer this, let’s take an
illustration from three good friends; Andrew, River and Walt. Now they had low,
medium and high risk appetites respectively;
ANDREW
 |
Image Credit: 401(K)
2012/Flickr
|
Andrew with his low risk appetite
would chose a low or ‘risk-free’ investment. He prefers to have a good night's
sleep all year round doesn’t he?
Thus the options open to him are
placements, bonds or treasury bills. These investments are most times
government backed however they offer low return on investments; usually ranging
from 4%-15%PA. Now while the risk is very low, if Andrew takes inflation into
consideration it may turn out that rather than making a gain, he may actually
make a loss.
To understand this better let's take
an illustration; Assuming Andrew invests $ 1,000 in placements which promises
7% PA, with an inflation rate of 9%, at the end of one year he would get a
total of $1,070 right? Now imagine as at
the time of the investment, his $1,000 could buy him a basket of goods; however
as at the time of maturity of the investment, these same basket of goods will
go for $1090 as a result of the 9% inflation. So it turns out that Andrew is
actually worse off.
Consequently,
"In investing, what is comfortable
is rarely profitable." - Robert Arnott. Thus when investing in these low
risk securities, one needs to do proper analysis and ensure the rates being
offered are worth it.
RIVER
 |
| Image Credit: Deutsche Fotothek/ Wikimedia |
Now, for River; with his medium
appetite, he most probably would want a diversified portfolio; i.e. have some
low risk investments and some high risk investments. So while some money would
be invested in low risk investments such as, bonds and treasury bills, he’ll also
invest some in a business. His investment in business could be via purchase of
shares; this represents higher risk due to the volatile nature of equity
investments. It’s a common believe that the average return on equity
investments ranges between 10-12% PA, unfortunately, it’s not quite that simple.
However, this option is likely to put River in a much better situation as
depending on his mix of investments.
Expectedly, his returns should be
higher than Andrew’s right?. Be on the look out though, because "The
stock market is filled with individuals who know the price of everything, but
the value of nothing." - Phillip Fisher.
Investing recklessly will ultimately lead to regrettable
investment decisions, so be sure to get your analysis right before setting off.
Of course you know that this goes way beyond just listening to popular opinion.
WALT
 |
| Image Credit: Patisserie/Wikimedia |
Walt belongs to the school of thought
that believes that if there is no risk, there is no reward. He tells himself
often that life is either a daring adventure or nothing at all. Walt believes
that investments are all about profitability and would go for investments that
offer the highest returns irrespective of risk.
Walt’s investments range from owning
his own business, to venture capital trusts, to unregulated collective
investment schemes, to spread betting (more like placing a bet than
making an investment. You bet on whether something – like the value of a share
– will go up or down. The more it changes, the more you stand to win or lose)
and so on
Now while Walt’s returns are open to
greater risks, on the flip side, he is being offered the highest return on his
investments – if all goes as smoothly as he hopes. Sometimes the return on
highly successful personal businesses can be as high as 70% or more, not
without the risks though.
In summary, you really don’t need to
invest like Andrew or his buddies. However, since everybody falls into one of
these 3 categories of individuals, what matters is that you identify your field
of play and play by your own rules. After all, it's your money!
What better way to sign off than to
leave you with these wise words from Robert
Kiyosaki.
"It's not how much money you make, but how much money you keep, how hard it works for you, and how many
Generations you keep it for."
Ponder
that!
