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More and more people have realised the importance of investing. Previously, the major source of investment for many was land and houses. Today, more people are going for shares, bonds, bills, unit trusts, insurance etc. It is important that investors realise that an investment portfolio must be balanced properly depending on the investor’s risk profile, age, needs and goals.
It is unfortunate that some people put all their monies in shares while others put all of it in land. For the young working class, it is always a choice of mortgages, insurance, cooperatives, etc, for the extra shilling on their pay-slip. The middle aged always ask themselves whether to pursue further studies, go for the mortgage, build a rural home, or start the dream business. And for the retiree, the choice lies between unit trust funds, bonds, fixed deposit account, shares and that coveted farmland.
These people have different needs, goals and ambitions. Notwithstanding the investors’ needs, the principal of diversification stands through. Building a strong investment is like building a permanent house. There has to be a foundation, a wall and a roof. After that we will need fittings and later on furniture. There is an elaborate procedure that has to be followed (at least most of the times) while constructing a house. First, you work on the foundation, then the walls, then the roof. Later on you can do the fittings and finally buy the furniture.
This process takes time, sometimes months or years. In the same vein, a strong portfolio must have a foundation, walls and a roof. Most players in the market will tell you a foundation should not be liquid and should not be fluctuating in value. So real estate investments make the best foundation in a portfolio. This ensures capital preservation and secure growth, given the demand for land in our country. However, when it comes to real estate, location is important because it will determine current value, growth opportunities, usage of land etc.
Secondly, a good investment must have walls. Ordinarily, walls are supposed to keep you warm and safeguard you from the winds and cold. The wall is something that makes sure you have a good cash flow or constant supply of income for your daily or monthly needs. This source safeguards your wealth by taking care of all your bills. This could be in form of a salary, an enterprise (going concern) or rent money being received regularly. This is where a majority of us are, as we focus on income and not asset building.
Thirdly, the roof. The roof adorns the building but also protects the house on a rainy day. In investment terms, a roof is something that has high liquidity and high growth opportunities. The options that fall in this category are shares, bonds, and mutual funds (otherwise known as unit trust funds). These give an investor great growth opportunities and are very liquid (i.e. can be converted into cash easily). It is necessary that an investor includes these options in their portfolio so they are able to grow their cash while also able to access it when necessary. This part of the portfolio ensures capital growth and/or preservation depending on the investor’s choice of stocks, bonds and unit trust funds. Stocks are easily available at the stock market while mutual funds can be accessed from asset managers like British American.
Finally, a good investor will know that one must live today, much as he/she is planning for tomorrow. This is why the fittings and furniture in a house are as necessary. Generally, they add value to the life of the people living in that house. They ensure safety, beauty, comfort, convenience etc. In investment terms there are investments that ensure comfort, luxury, convenience, safety such as insurance, SACCOs, pensions, cars, music systems etc. A good investor will consider having these as well to reinforce their portfolio and ensure longevity and success. The common factor is that these elements may need renewal routinely, either monthly, quarterly or annually. In the short run they look like expenditure but may prove to be very costly to ones resources or wholeness if ignored.
If you want to build a great house you sit down, draw a plan, gather information, from different professionals at different levels. So too does an investor. For instance, you could dream of being worth Kshs100 million in 10 years. You may need to sit down and draw a plan on how to do it, rather than run after everything that looks like an opportunity blindly.
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