What is investing?
It simply means putting some of your hard earned money to work so that it can make money on its own. You may have read or heard people saying that they don’t work for money but money works for them. To live this statement you need to earn that money first, either working for money by getting yourself a daily job or start a small business that is profitable enough to enable you to put some aside.
What makes investment possible?
Putting money to work is possible because in the world economy, there are individuals, companies and governments that spend more than what they make (deficit unit) and those that spend less than what they make (surplus unit). Together with some other reasons, this spending difference has led to the development and sustainment of capital market industry in the world.
To allow you to invest, capital (money) has to exchange hands from the surplus unit to the deficit unit. These exchanges are enabled by capital market infrastructures that are supervised by financial services regulators such as NAMFISA. Those that fall in the surplus unit may put their money to work by giving (lending) it to the deficit unit such as companies and government that need it for various reasons. These units do it by issuing either shares or fixed term securities such as bonds. For instance, when you buy a bond, you are lending your hard earned money to government or a company for a certain period of time.
In return, they promise to pay you interest on your money and the principal (initial capital) at the end of the agreed period. Bear in mind though that this investment is not necessarily guaranteed because if the company you have lent money to goes bankrupt, your money may be lost but if there is any money left after the company goes into liquidation, a bondholder will be paid before the owner takes their shares.
How does money get put to work?
There are many ways you can go about investing. These include putting your money into stocks (shares), bonds, collective investments (unit trusts) and real estate, to name a few. Consider investment in the form of weight control. To reach your desired body shape and to sustain it will not happen over night so investment requires some time to start paying off. Bear in mind that there is no short cut in investment. Serious investors have a plan just like someone who is exercising to either loose or gain weight and only commit their money if the investment opportunity or product will meet their objectives. Herewith some of the items to consider before investing:
Know what you want to do or what you have committed to do in the future.
Turn these wants into achievable goals. Furthermore, make sure that you set SMART goals that are specific, measurable, attainable, realistic and time based. For instance, you may want to do the following in the future:
• You will be making a down payment on your vehicle deposit in 3 years time.
• You will be required to contribute N$30000 to your child’s education in 10 years.
• You will be retiring in 35 years with an income of N$216000 (N$18000 monthly) a year for at least 20 years.
Now that you have your goals set, it is time to determine your risk appetite by asking yourself the following, while keeping in mind that higher return comes with higher risk:
• What is important to you? Is it to keep your money safe (in a savings account) or to grow your money (investing)?
• How much time do you have to invest? With the goals set above, the vehicle deposit is nearer in comparison to the education and retirement goals. Since you will need your money in 3 years time, you may want to protect your capital (deposit savings) by sticking to less risky investment options such as short-term instruments (money market funds). For your retirement savings, you have 35 years before you retire, you may consider riskier investments
such as shares. By sticking to only savings products or short-term instruments, your money will grow slower in relation to inflation. Inflation destroys the value of your money incrementally. Shares and properties, although volatile in nature, their growth potential beats inflation.
• How would you react to the ups and downs in your investments? Will you sleep at night if your investment loses is 50% in value? If not, reduce your investment exposures to volatile assets.
Are you comfortable investing on your own?
Now that you have well set goals matched with the available investment instruments or assets classes, you have to either elect yourself or someone with the investment expertise to do the investment for you. If you don’t want to give control of your money to someone and you prefer to build your wealth yourself, make sure you have the following strong traits: you don’t need to be a charted accountant but you need to have a strong
financial background/education and keep investing in your financial education as much as you can; the financial education is needed as you will be carrying out research to determine investment opportunities that will meet your set goals and will have to make sure that you will have the time to do the research and keep up with the market for your identification of investment opportunities.
If you are not comfortable doing the investment yourself, you will have to pass your hard earned money to an investment professional for your investment. The investment professional will help you meet your set goals but this help comes at a cost as the professional will employ the resources to do the research and stay up-to-date with the market for your investment benefit. Make sure you are dealing with a registered investment professional. For the list of registered investment professional, see the
NAMFISA website or contact NAMFISA.