Investing – The Next Phase to Wealth Building

The next course of action after putting together a solid retirement plan and cultivating a consistent saving habit is investing.

What Investing Means

Investopedia defines investing as:

the act of allocating resources, usually money, with the expectation of generating an income or profit.

Investing takes time, it does not typically make one wealthy overnight. It is delayed gratification because you are giving up something today in exchange for something greater in the future, more money.

Paul J. Lim in his book Investing Demystified (Page 10) said, “The greater the length of time you’re willing to delay that gratification, the greater the odds of being rewarded for your patience. Sometimes, to invest properly and safely, you may need to tie up your money for months, if not years, if not decades – if not longer.”

Investing, Saving, and Speculating

Understanding the distinction between investing, saving, and speculating is vital.  Please see below an extract from Stock Investing for Dummies 2^nd edition (Page 32) by Paul Mladjenovic which explains the difference:

“Investing is the act of putting your current funds into securities or tangible assets for the purpose of gaining future appreciation, income, or both. You need time, knowledge, and discipline to invest.

Saving is the safe accumulation of funds for future use. Savings do not fluctuate and are generally free of financial risk. The emphasis is on safety and liquidity.

Speculating is the financial world’s equivalent of gambling. An investor who speculates is seeking quick profits gained from short-term price movements in that particular asset or investment.”

Risk and Returns

The biggest risk of all is not taking one.

— Mellody Hobson

Two words synonymous with investing are risk and returns. Paul J. Lim in his book Investing Demystified (Page 26) said “There is a basic relationship in investing: The greater the risk, the greater the reward. The corollary to this rule is that the lower the risk you take, the lower the reward you’re likely to receive.” Risk should therefore be factored in all your investing decisions.

Do note that in seeking higher returns, one should take calculated risks. Making hasty and unwise investing decisions solely for greater returns may lead to huge losses. Risk can be reduced by diversifying your investment portfolio through owning different types of assets.

Investment Types

Subject to your level of risk, there are several asset types that you can invest in. These include:

1. Money market products – These are short term investments usually with lower returns. This includes Treasury bills, commercial papers, etc.
2. Real Estate – This involves purchasing land with the intent to develop it and sell it for a profit or renting it out for a fee.
3. Cryptocurrency – A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Popular examples include Bitcoin, Ethereum, Tether, Binance Coin. Investing in cryptocurrency is considered risky as there is a potential for significant gains or huge losses.
4. Mutual Funds – This is investing from a collective pool of funds into pre-agreed areas such as shares, bonds, money market products, etc. Mutual funds are typically managed by a funds manager and regulated by the Securities and Exchange Commission (SEC).
5. Shares – This represents a specific unit of ownership of a company. Investing in shares is best suited for making money in the long term.
6. Forex Trading – Forex stands for foreign exchange. Forex trading is the process of speculating on currency prices to potentially make a profit. Currencies are traded in pairs, so by exchanging one currency for another, a trader is speculating on whether one currency will rise or fall in value against the other.
7. Fixed Income Instruments – You earn a fixed percentage from an investment. Fixed income instruments include government bonds, corporate bonds.
8. Gold and other precious metals – These can be purchased in their physical form or through an exchange-traded fund (ETF). It is used to hedge against currency devaluation, inflation, or other economic downturns.

Why Investing is Important

Here are five reasons why it is necessary that you invest:

1. To make more money – Making the right investments is a sure way to increase your wealth.
2. To achieve your goals – Investing enables you to accomplish your financial goals. This could be attaining economic independence, sending your children to ivy league schools, retiring early, etc. Setting a general timeframe for achieving these goals will determine the type of investments you go with.
3. To beat inflation – It is always best that the return on investment is above the prevailing rate of inflation in your country. Or else, inflation may eat up the gains from your investment as money loses value over time.
4. For the future – Living in the present without making plans is not in your best interests. While we do not know with 100% certainty what the future holds for us, it is sensible that we are prepared for it as best we can. Investing wisely is one way to do this.
5. To earn passive income – Investing enables you to earn income without your active involvement. An example of this is receiving dividends from a company you own shares in.

Investing Where to Start

1. Have a plan for your financial future. Planning family vacations are all well and good, but it is crucial to set aside time to plan for your financial future. Family vacations are usually for a few short days, while your future could entail 40 or more years of living. So, spend time considering the various investment options and decide which ones are right for you.
2. Determine what kind of investor you are. Are you investing to meet short-term needs or intermediate-term goals or are you in for the long haul? Do you prefer taking more risks for potentially greater returns? Or do you prefer to make safe investments where your capital is secure, but the returns are low? These are questions to ask yourself in figuring out the type of investor you are.
3. Determine how much you have available to invest. Look at the amount of money you have saved up thus far to find out this.
4. Map out your investment strategy. Invest with purpose and knowledge. Investing blindly is gambling. What type of investments do you want to own and how much of each? Having an asset allocation strategy is essential. This involves defining the right mix of shares, bonds, and other assets.
5. Identify available investment opportunities. Make enquiries about existing investment opportunities.
6. Figure out the specifics of the securities that will go into your portfolio. For example, do you want to purchase shares in Dangote Cement Plc or GTCO Plc?  Also, know how much money to invest in each security once selected.
7. Learn as much as you can. “An investment in knowledge pays the best interest.” — Benjamin Franklin. Get knowledge about your investment options so you can make informed decisions. Don’t rely on someone’s word about an investment. A good place to start is Google and Investopedia. Read books and other relevant online resources. Even if you have an investment adviser, it is important to at least know enough to be able to tell whether the professional is working in your best interest or not.
8. Carry out due diligence. Shine your eyes! that is, be vigilant. Don’t be quick to invest your hard-earned cash into any venture because it appears lucrative. Ensure that the investment opportunity is legitimate and be aware of the potential risks involved.
9. Track your progress. Check your investment decisions at least quarterly to determine if any changes need to be made to your investment portfolio. “Know what you own, and know why you own it.” — Peter Lynch

Remember, the whole point of investing is to undertake a long-term journey with your money. But it makes no sense to start this journey if you aren’t totally prepared. That means saving up enough money to make this journey worthwhile. It means taking care of other financial obligations so you won’t be distracted over time. And it means plotting out a proper course before you get started. – Paul J. Lim

Culled from Investing Demystified (Page 28)

My Foray into Investing

For the longest time when I saved money, I had no idea what to invest it in. So, I normally spent it. Here’s a great example of this. I faithfully served my country for a year in Calabar, Cross River State under the National Youth Service Corps (NYSC) program. During this period, I had saved up funds that I didn’t know what to do with. After deliberation, I decided to use most of my savings to buy an iPhone. Sadly, within six months of purchase, it was stolen. In hindsight, I realised that I should have invested the funds. The issue was I didn’t know what investment opportunities were available.

Thereafter, I delved into the investing space by buying shares as I always wanted to own shares. I just did not know how to go about it. Clarity came to me through a wonderful lady, Oladunni Fasugba, who gave me a ride to work in 2013. We got chatting and she mentioned that she worked in a stockbroking company.

I asked her how I could go about buying shares with minimal funds. She told me that I could buy shares through her employer, Marina Securities Limited, with less than N10,000. She thereafter put me through the process of opening a CSCS (Central Securities Clearing System Limited) account.

On 23 January 2013, I purchased shares through my brokerage account with Marina Securities in Okomu Oil Plc (100 shares at N53.70k each), Nestle Plc (6 shares at N746.30k each), and Guaranty Trust Bank Plc (200 shares at N24.32k each). This is how I officially started investing.

Since then, I have invested in mutual funds, gold jewellery, FGN (Federal Government of Nigeria) Savings Bond, cryptocurrency, agritech, etc. Do note that I haven’t always made the best investing decisions as I have made investments where my capital became stuck or was lost.

One thing that has helped me to broaden my knowledge base about investing is reading. I bought and read several investment books which helped a great deal.

One of my favourite books on investing is Investing Demystified by Paul J. Lim.

The book lives up to its name. It’s easy to read and comprehend. I got to learn about the types of investments from this book. You can buy this incredible book from Amazon by clicking the link below:

5 Investment Tips

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1. Invest in what you understand and have control over. Trust, but verify. Don’t invest just because a friend or family member recommends an investment scheme to you. Carry out your own research to find out how genuine the investment scheme is. “Get multiple views. Don’t base your investment decisions on just one source unless you have the best reasons in the world for thinking that a particular, single source in outstanding and reliable.” Extract from Stock Investing for Dummies 2^nd edition (Page 88) by Paul Mladjenovic.
2. Apply common sense. You need a clear head when investing so don’t act hastily or if you feel pressured. If you have reservations about an investment, it probably means that you need to prod deeper. You can’t be too knowledgeable about an investment. Get as much information as you can before investing. Limited information about an investment could be a red flag so beware.
3. Be suspicious of very high returns. Get rich quick schemes are not investments. It is gambling at its core with a high chance that you may lose all your funds. If the returns are too good to be true it probably is. It may be a red flag that the investment is a scam or Ponzi scheme.
4. Popular opinion is not always right. A classic example of this was the MMM Ponzi scheme. Millions of people were defrauded of their money because of this scheme. It was popular even though there was no underlying business to support it.
5. Seek qualified professional help. There is absolutely nothing wrong with seeking professional advice if the help you receive is sound and reasonably priced. This could be in the form of providing asset rebalancing advice or informing you of new investment opportunities. Ensure you engage the services of a legitimately registered investment advisor. In Nigeria, you can check the SEC (Securities and Exchange Commission) website to confirm if a person or company is a registered capital market operator. Click here to see the list of capital market operators on the SEC Nigeria’s website.

Courage taught me no matter how bad a crisis gets … any sound investment will eventually pay off.

— Carlos Slim Helu

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I would love to receive your feedback on investing. What was the first investment you made?  What investing mistakes have you made that we can learn from?

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Disclaimer – This post is not investment or financial advice. You must conduct research before investing. Kindly seek professional investment/financial advice from an investment/ financial adviser. This post may contain affiliate links and I may earn a small commission when you make a purchase through the links at no additional cost to you. Thank you.