Personal Finance

Why you should start investing at an early age

So as to maximise your returns, you should invest regularly say once a month instead of investing a lump sum at one go. FILE PHOTO | NMG 

The Nairobi-Thika highway and other major roads in Kenya perhaps have more bars than any other business, because young people in Kenya are known for partying, buying the modern smart phones and the blue Subarus. The same youths have little or no investment.

Investment is an art that every individual must learn as he starts his work life and earns his livelihood. When you are fresh out of college and into your first job, you have relatively less responsibilities, sufficiently good surplus money and ample avenues to spend. There would not be anybody questioning you on how much you spend or how much you save.

The first lesson one must indoctrinate when you start your work life is that instead of saving what is left after spending, one should inculcate a habit of spending what is left after saving. Money saved is money earned!

As a senior, I would like to advise you to first invest in yourself; there is no better investment than education which will fetch you a better job and a rewarding career. Read as much as you can, even if it is not related to the stream you are working in or operating in.

There are many asset classes one can invest in. One should not be apologetic about making money; the choice of investment vehicle should be such that it creates wealth over longer term, even if the returns are volatile. The fixed income returns are almost equivalent to the inflation of the economy, hence not a source for creating wealth over long term.

Real Estate requires large sum of money to be invested at one go, hence not advisable for a relatively fresh college graduate. Being an illiquid market, it becomes difficult to dispose off real estate investment, if one needs money urgently.

In order to reduce the adverse effects of equity investments one should strictly practice few principles:

Have a reserve cash of 3-6 months in the bank. This would take care of any emergency like medical crisis, travel (inland or abroad), temporary loss of job or any domestic tragedy. Equity Investments are to be committed for long term.

Seek expert advice: Being volatile in nature, understanding the equity markets is difficult. Look for an expert’s advice when you initiate equity investments.

Do It Yourself: If you plan to invest on your own, you should thoroughly study the company whose shares you are planning to buy. Understand the business model, company’s strengths and weaknesses and whether the company has pricing power.

Study the industry in which the company is operating along with the competitors. Since you are partnering with the management of the company, you should do a thorough check about the management of the firm.

One can never time markets. So as to maximise your returns, you should invest regularly say once a month instead of investing a lump sum at one go.

This process enables you to accumulate a specific share or the units at different price points, for example you end up buying more in falling market and less in rising market for a specified fund every month thus averaging out the cost of acquisition.

Ignore noise: An intelligent investment entails focus on the investment theme cutting away from the noise going around. The ability to manage the two vices viz. the greed and fear and following a disciplined investment regime determines the success for the investment. Avoid impulse buying or selling. Let the investment be process driven instead of it being emotion driven.

Avoid herd mentality: A smart investor charts his own course, avoids following others. Instead of following the trends, anticipates them in advance. Following the crowd never yield good results, they are traps created to beguile innocent investors.

Diversify and reduce the risk associated: It goes by saying- Do not put all your eggs in one basket. Divide your investible surplus in different stocks of unrelated sectors. Volatility is the nature of equity markets. If one sector under performs, other may outperform, thus balancing the overall returns. Balance greed and fear: Two emotions viz. greed and fear dictate the market movements. The investors react to any event on the basis of these two emotions. An investor should analyse if the event (which has caused price volatility) has any material impact on the investment rationale of the stock and accordingly respond. A smart investor becomes greedy when the market participants around are fearful, while becomes fearful when the market goes bonkers!! It has been proved time and again that the investment made at the time when the market is under distress has borne spectacular results over long term.

Handle boredom and envy: Two more emotions to be handled deftly are boredom and envy. An average investor is more concerned about what his fellow investor makes than what he makes. He tends to keep a track of what is moving and ends up joining the herd only to get caught at the wrong end. This is an outcome of envy. Instead, he should have conviction in his own portfolio. Concentrate on the positives of his portfolio, monitor and make amend whenever necessary.

Finally, make a beginning as “The journey of a thousand miles begins with one step”. Take calculated risk and get rewarded for the same. Do not fear losing money, every rich person has lost money at some point, but many poor people have never lost a dime. Playing not to lose money means you will never make money.