Investing Basics

Did you know that it is almost impossible to grow real wealth without investing wisely and properly managing your money? Yeah, that’s right.

According to Investopedia, an investment is an asset or item acquired to generate income or gain appreciation. Income generation means that the asset brings you money periodically while asset appreciation means that the asset increases in value over time.

Investment requires that you lay aside a resource today, like time, effort, and money so that in the future it becomes more valuable by generating a profit for you.

It is similar to saving in that you’re disciplined to keep money aside without spending it immediately. However, investing goes a step ahead of savings because you don’t just keep the money aside, you send it on an assignment (probably to make more money for you).

One of my mentors says that saving simply means keeping some money aside while investing means sending money on an assignment (and the assignment is often to make more money for you).

Even though investments are a fail-proof way of building wealth, it’s not right to begin investing without putting certain things into consideration. These things will determine the type of investment opportunity you jump on, the duration or timeline of such investment, how much you invest, etc.

Some of them are;

1. Your unique financial situation
2. Your investment goal
3. Your risk tolerance/ temperament
4. Your time horizon
5. Your capital and income
6. And your age

1. Your unique financial situation

What does your finances look like right now? What do you currently earn? Are you in debt? What assets do you have? Do they generate income for you? etc. These (and others you come up with) are questions you should honestly provide answers to in order to know where you stand financially. You can’t know how far  you must go if you don’t first have an idea of how far you’ve come and  where you are at the moment.

2. Your investment goal or objectives

The next step to investing successfully is figuring out what your investment goals are – either by yourself or with the help of a financial professional. If you’ve finished with the first step above, this should be easy.

Your investment goals refer to the things you hope to achieve with your investments. More like your “why” for investing. For someone whose current reality is that they’re in debt (from step one above), your investment goal may be to pay off the debt.

Someone who is approaching retirement may be looking to create a steady source of income for when they eventually retire.

Another person’s goal may be to go on a foreign vacation, purchasing a vehicle, or accumulating wealth. This objective will then guide your choice of investments.

Goals could be short-term (like a vacation, paying off debt, or buying a new car) or long-term (like wealth-building for a comfortable retirement and leaving a legacy for your children and future generations).

The best goals will help you understand your financial objectives and ensure you make the right money moves.

Also, when you clearly define your goals, you can then create a realistic plan for your financial journey and proceed to the next step.

3. Your risk tolerance

Risk tolerance plays an important role in shaping the investment strategy a person employs. In investing, risk tolerance refers to how much loss an investor is willing to bear with a particular investment decision.

It reflects how comfortable you are with market fluctuations and potential losses on an investment. In reality, there is no guarantee that all your investments will always yield  the returns you desire. 

As an investor, understanding your risk tolerance is crucial because it influences your asset allocation, investment choices, and overall financial strategy. 

Investors are generally grouped into three according to the level of risk they can handle. They are conservative, moderate, and aggressive.

Conservative investors are more risk-averse, preferring stable, low-risk investments like bonds and treasury bills, while aggressive investors are willing to embrace more risky investments like stocks and ETFs, for potentially greater rewards.

Moderate investors, falling in-between these extremes, often seek a balance between risk and stability. They may invest in a mix of stocks and bonds, aiming for steady growth while still controlling the risk they take. The general rule here is that the higher the risk, the higher the potential returns. 

To determine your risk tolerance, consider factors like your financial goals, timeframe you want to invest for, and your emotional resistance in the face of market volatility.

4. Your investing time horizon 

This refers to the time in which you want to achieve your financial goal and it is as important as the goal itself. If you have a huge financial goal for a short timeframe, you may be tempted to take on some very risky investments.

However, that is not a wise thing to do, especially as a beginner because when investing, it is better to do so with a long term perspective.

It is very important to decide before investing what the time horizon is over which you are going to invest.

In simple terms, the time horizon is how long you are going to keep your money invested. That is, the length of time you can do without the money you intend to invest in order for it to generate returns for you.

Knowing this time horizon is important because it will determine your investment vehicle and how much risk you take on.

Investment time horizon may be short term (1-3 years), medium term(4-7 years), or long term (8-10 years and above).

You should note however, that an investment goal (example buying a car), that may take one investor two years to achieve may take another investor 6 years to achieve.

That is why setting a realistic time horizon for your peculiar  investment journey is key to being a successful investor.

The most successful investors often recommend a long-term approach towards investing. When you hold onto investments over a long period of time, you can benefit from compound interests.

Whether it’s stocks, bonds, or real estate, time is powerful enough to allow your wealth to grow exponentially. Also, when you’re investing long term, you don’t feel the emotional stress that comes as a result of short-term market fluctuations.

These fluctuations can cause anxiety and lead to impulsive decisions but long-term investors are excused from all these.

5. Your available capital and income

How much capital you have available for investing will greatly determine what you invest in.

For instance, someone that has $100 may invest in a Federal Government Bond while another investor that has $1000 may decide to invest in real estate.

Like the name suggests, available capital is money that is ready and available for investment. In other words, this is money that you can invest without impacting your general lifestyle. 

Because no investment is 100% guaranteed to yield profitable returns, it is advised that you invest only what you can afford to lose.

Nigeria has a volatile economy such that even a very promising investment may go wrong. So before you invest your available capital, you should be sure that you’re comfortable with losing it all if anything goes wrong in the market.

Before you even start investing, your emergency fund should have at least 3-6 months of your living expenses saved in it and untouched.

This is so that you will have what to survive with while your cash is tied up in the market. You don’t want to be forced to sell a long term  investment before time.

Take a look at your current savings and disposable income. The amount you can invest will ultimately depend on the financial resources at your disposal. The more capital you have, the more investment opportunities you can explore.

Also, one of the roles your income plays in your investment is that if you have a stable source of income, you will be comfortable and will likely tilt towards more risky investment options.

Whereas a person with an irregular income may likely follow a more conservative approach towards investing.

6. Your age

Your age also influences your investment. Here is how;

If you’re investing in Your 20s, you may want to explore more and can afford to take more risks because you still have a long time before retirement.

Your asset allocation may be as follows:

80-90% of your investment portfolio may be invested in stocks.

While 10-20 of your portfolio may be invested in bonds.

As a young investor, you have more time on your side and this allows you to tolerate more risk. Some of your investment goals may be to pay off student loans, to build an emergency fund and to probably start investing for retirement.

Investing in Your 30s and 40s is slightly different. You will want to gradually reduce your exposure to stock and increase your investment in bonds and treasury bills. You may even have the resources to start investing in real estate.

At this stage in life, your priorities may be to continue setting aside some money in your investment portfolio, to diversify investments (consider real estate or other assets), and of course, build wealth for future generations.

  As you approach midlife, you should aim at balancing the growth potential of your investments with reduction of risk. Even though you’re still accumulating wealth, you also need to protect it as well so that you don’t lose what you’ve gathered so far.

If you are investing Near retirement (say age 50 and above), you will tend to be more conservative towards investing. It’s advised that you further reduce your exposure to stock and focus on income-generating assets like bonds, dividend-paying ETFs and real estate.

At this stage of investment, your priorities are most likely to preserve your capital, plan for withdrawals and consider annuities.

With less time to recover from investment losses, stability becomes more important. It is wise to prioritize income while preserving your capital.

Conclusion

In conclusion, investing may be a very effective strategy for accumulating wealth, but it must be done right to avoid losing your money altogether.

First, start by determining where you are financially. Think about the assets, debts, and income you currently have. This self-awareness will help you make informed investing decisions.

Next, identify your investment goals. Do you want to pay off debt, generate retirement income, or accumulate wealth? 

Then you proceed to determine the level of risk you can tolerate. Conservative investors value safety, whereas aggressive investors seek greater profits. Find your unique spot.

After you’ve determined your risk tolerance level, what are the investment options you have? Based on the capital you have to invest, which of these options can you afford? 

Remember, investing is not a one-size-fits-all approach. Customize your options to meet your specific needs and goals. In little to no time, you’ll be on the path to financial growth and you will have yourself to thank for it. Happy investing!