Business Analyst - August 9

Tuesday, August March 9, 1, 2022 2022
Financial Wellness With Richmond Kwame Frimpong:
Before you invest,
investigate! (I)
WHEn it
comes to
investing, it
does not
matter
whether
you are a beginner or have been
investing for many years. It is never
too early or too late to investigate. We
see too many investors who could
have avoided losses if they had
investigated just a little more.
Investigating before you invest
comes in two forms; the first
represents questions you ask yourself
as an avid investor, and the second
represents questions you ask your
potential investment house (advisor).
In this edition, we throw more light
on the questions you ask yourself.
these are the questions to ask and
answer yourself before you invest.
How much risk can i
take?
It is a common saying in
investments that: “the higher the risk, the
higher the returns, and the lower the risk,
the lower the returns”. Some investments
entail what we call a level five investment
risk; the risk that can result in absolute loss
of almost all your money. these
investments are too risky for most people
(particularly the risk averse). one easy way
to reduce investment risk is to diversify. By
doing so, you may still experience swings in
investment value, however, you can reduce
the risk of a complete loss due to bad
timing or other unfortunate circumstances.
to build a solid investment plan, you may
have to be cautious of buying only for high
yield investments. there is no such thing as
high returns with low risk. Better to earn
moderate returns than swing for the fences.
If you decide to swing, remember, it can go
wrong and you can experience big losses.
Kindly refer to our publication on risk
profiling to know your risk appetite.
What is my investment
objective?
An investment objective is the purpose
for which an individual invests.
Investments decisions must be made with
a clear goal or objective in mind: regular
income, liquidity, capital preservation, or
growth. the first thing you need to decide is
which of those characteristics is most
important. In other words, are you looking
for safety, income or growth from the
investment? Do you need current income to
live on in your retirement years, growth so
the investments can provide income later,
or is safety (preserving your principal value)
your top priority? For example, if you are 50
years or older before you invest, you really
should define your objective (for instance, a
retirement income plan). this type of
objective, for instance, will help you project
your future sources of income and
expenses, and your financial account values
including any deposits and withdrawals. It
helps you identify the point in time where
you will even need to use your money and
once you have a clear time-frame you know
whether to use short, mid, or long-term
investments.
What is my investment
duration?
How long one plans to invest their
money can alter their investment plans
and pivot the level of risk an investor can
take. Same is true of how easy to get your
money back if your need it urgently. Just
having a longer time horizon does not
guarantee a higher return, but it does mean
you have time on your side to consider
other investment options and strategies
that might give you an advantage in the
long run. Establishing a time
frame(duration) you can stick with is of
great importance. If you, for
instance, need the money to buy a
car in a year or two, you will choose
a different investment product
compared to if you are doing the
same to buy a property in 10 years.
In the first case, your primary
concern is safety – not losing
money before the future purchase.
In the second case, you are
investing in a long-term goal, and
anticipating significant growth in
returns. What you care about is
what choices are most likely to help
your account be worth the most by
the time you are ready to make your
withdrawal.
Do I understand the
investment product?
never invest in something you
do not understand. Before you
invest, ensure you understand the
investment well enough to explain
it to someone else. How will the
investment make money?
(Dividends, Interest? Capital gains?) What
specific risks are associated with the
product, what type of securities does the
product invests in etc. too many people buy
the first investment product presented to
them (by friends, family or bank sales reps).
With a good understanding of the
investment product, you are able to lay out
a thorough list of all the choices that meet
your stated goal, and it gives you a better
appreciation of the pros and cons of that
particular investment. next, narrow your
final investment choices down to a few that
you feel confident about. Some investments
are great for long-term retirement money.
others are more speculative, which means
maybe you can put some ‘play money’ or
‘take a chance’ money into them, but not all
of your retirement savings.
Where should I invest?
Where you invest your money is as
important as why you are investing the
money. Before you invest, it is imperative to
take time to investigate who would be
managing that investment and how safe
your money can be with them. one of the
smart ways of knowing who watches over
your money and their credibility is to take a
look at the governance structures, how well
they are regulated, as well as their track
record (have they been successful in the
past?). Investigate if the investment
product is licensed and regulated. Get to
know the board of directors, get to know the
management team, get to know how the
company is doing, compared to their
competitors and it will guide you in your
investment decision.
How often can I invest?
Automating your investment deposits
consistently over a period of time is still the
best way to invest more and worry less. this
helps the investor not to cede to the
temptation of spending unnecessarily, and
the laziness that comes with having to
physically walk or drive to the financial
advisor every month to make a deposit.
Automating your investment deposits can
thus be done via standing orders or direct
debit with your regular bank, and that will
save you a whole lot of time. It also helps
you to leverage on the power of
compounding at any time “t”.
How much can I invest?
Many investment accounts (i.e.,
collective investment schemes, fixed-term
deposits, bonds, etc.) have minimum
investment amounts. So, before you take
your investment decision, you have to
determine how much you can realistically
set aside to invest. Is the amount you are
investing a lump sum (a large sum that is
paid in one single payment instead of
broken up into installments), or are you
able to make regular monthly
contributions? Some collective investment
schemes, for instance, allow you to open an
account with very little amounts and then
set up an automatic investment plan
monthly which would transfer funds from
your bank account to your investment
account. Investing monthly in this way is
called cedi-cost-averaging, and it helps
reduce market risk. If you have a larger sum
to invest, obviously more options are
available to you. In that case, you’ll want to
use a variety of investments, so you can
minimise the risk of choosing just one. the
most important decision you will make is
how much to allocate to the various
investment classes.
Conclusion
When you ask these questions, write
down the answers you receive, and what
you decided to do. Share those conclusions
with your investment advisor (if possible,
via mail) to be sure you are on the same
page with them. So that just in case
something goes wrong in the future, your
notes/email would help establish what was
agreed on, and what has been breached. At
the point of asking these questions, let your
investment professional know you are
taking notes of whatever is being said, and
they will know you are a serious investor.
You may send comments, questions or
suggestions if any to info@flfafrica.org and
@richmondkwamefrimpong across all
social media platforms