Investing is the act of committing money for an endeavour with the expectation of obtaining an additional income or profit i.e. putting money to work for you.
It is always a big challenge for everyone in deciding how to invest but the big hurdle is first deciding what to invest in before learning how to invest. Investing is a skill to be learned and it comprises many other skills such as patience, observation, research e.t.c in order to do well in investing.
In this article, the basic types of investments will be discussed while how and when to combine several of these investments portfolio will be discussed in the next article.
There are basically two ways to deal with income for any person looking at reducing excessive spending and planning for the future:
There is a huge difference between the two; whilst investing involves creating wealth and bearing more risk, saving is more guaranteed but with little or no returns and less risky. Investing involves giving out money in return for profit whilst saving only preserves money the way it is.
Whilst both are good, it is advised to have more of investing and less of saving; however, you may save in order to invest.
To invest, you must:
- Plan: define your goals, understand your asset allocation and look after (monitor) your investments.
- Be disciplined: observe market movement, understand the risks and their impact. Live within your means and decide how much to set aside for investing before developing your plan. Note: the longer you hold your investment while reinvesting your income, the bigger the potential of your returns on investments (ROI).
- Forecast: this is not a guaranteed indicator of future performance of a value of investment as investments are highly volatile and can reduce or increase in value at any point.
|CATEGORIES OF INVESTMENTS|
1. INCOME ASSETS
· Targets only income
· More stable in terms risks
· Lower returns
· E.g Rents from private properties
2. GROWTH ASSETS
· Targets reinvestments and increase in capital and returns.
· More risky
· Higher returns on investment.
· E.g. Bonds, Equities, Commercial real estate e.t.c.
TYPES OF INVESTMENT PORT FOLIO
- EQUITIES INVESTMENT: this is sometimes known as shares or stocks. It refers to ownership of a company which gives the investor the right to participate in the future financial performance of a business/ company. Of the entire major asset, Equity has been known to have the highest return on investment (ROI). It is risky because its value is very volatile- you may get less than invested. An example of this is like buyibg shares from First bank of Nigeria or Nestle. By doing this you become entitled to the dividends(profit) made by the company.
- BONDS INVESTMENT: it is basically a loan given to the bond issuer. They are fixed assets with a fixed interest and can balance the high volatility of Equities. Examples of bonds include corporate bonds, and government bonds. It is advised never to buy bonds from a company until the credit worthiness of that company has been evaluated. This is the same step taken by commercial banks in deciding to lend to customers. Not every company’s bonds should be bought only that of reputable companies.
- PROPERTY INVESTMENT: This goes beyond owning a home, investors who wish to diversify their property investment, are advised to diversify into commercial property through property funds just like equity or bonds. There are a number of real estate companies offering property investment options in return for quarterly or yearly returns. To invest in this portfolio, the following must be taken into the following:
- Familiar terrain, Areas with high growth prospects, Rental yield-high rent areas, Vacancy rate- the higher the vacancy rate, the less desirable the area making it less likely to sell or rent in the future.
- CASH INVESTMENT: this is rather a short obligation usually less than 90 days. Returns on investment are in form of payment of interest. This is mostly done with banks especially commercial banks; sometimes interest on certain accounts are automatic, i.e. once your money in your account lingers for a period of time, specific interest is paid on it. Examples are savings account, Money market, certificate of deposit. The fact is that cash investments are less volatile of all other investment types discussed; however, it tends to yield the lowest returns on investments (profit). These are only advisable for a short term goal/plan.
It is a good way to save cash temporarily whilst deciding on other investment plans.
In our next article we shall discuss on how to combine investments and how to monitor your investments to yield maximum productivity.