We all have different goals and aspirations in life and to be successful, our money goals must be structured to support our goals to enable us to live the lives we want. Are you looking to buy a house or putting money together for a master’s degree? Are your goals more long-term in nature and you’re already thinking about retirement? Whatever your goals are, saving is a good habit to set you on track but a bad strategy for wealth creation. We all want to save and invest our money to grow it. No rational investor wants to lose money. Investors want to protect their money, grow it and enjoy the benefits of financial security.
The most important thing to seek as an investor is information – what is this investment opportunity about and why is it right for me?
Which other things should you consider? Let’s jump right in:
- Investment information: I shall say it again; information should be top of mind. Ask all the pertinent questions before releasing your money and if you still have grey areas/unanswered questions, ask again! If you’re not questions, ask again! If you’re not convinced that all bases have been covered, perhaps you should reconsider your options.
- Financial goals: What is your goal for this particular investment? Are you investing to provide for something in particular? Your goal largely informs your time horizon and risk tolerance. For example, if you’re investing to make up funds for your master’s education next year, your time horizon is one year, and that money cannot be invested in the stock market. So, what is the investment tenor, and does it match your goals? What is your comfort zone in taking on investment risk? Are you scared to lose your money or happy to take on medium – high risk? Is capital preservation key for you? Relatedly, is your existing investment portfolio diversified enough? Do you have enough fixed income investments to accommodate a different asset class.
3. Counterparty considerations: Now that the strategy is clear, the following must be considered. Who are you lending your money to? Who is the issuer of the security? Can you trust them with your money? What is the perceived counterparty risk, and does it fit your risk profile as identified above? Will you get your money back? Is the company regulated by the requisite authorities for that sector e.g. Central Bank for the financial institutions and SEC for Corporates? If you’re buying equity, the decision must be backed by lots of research into the company’s fundamentals.
- Investment return: This speaks to the interest rate/yield being promised. Does this amount reward you adequately for the risk, time and counterparty considerations we described above? The wish of every investor is to make out money and collect it back in full, with interest. Make sure you’re comfortable with the risk/reward situation as any investment that promises misplaced extraordinary returns might be a scam.
The factors I described above are key considerations for majority of investment opportunities, whether it’s for Fixed deposit accounts, Treasury bills and bonds, Mutual funds, Real Estate, Gold, Agribusiness or SME funding.
You must ask all these questions and I believe the ultimate question remains – will you get your money back?
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