When should you start investing?
It is never too early to start investing. Investing is the smartest way to secure your financial future. The earlier you start, the more time your money has to compound and grow. This simply means that the interest from the money you have invested is put back into your investment, allowing your money to grow faster. Also, people that start early are able to learn and make mistakes early when they have little to lose, while gaining knowledge and experience to help when they have larger sums to invest, increasing their chances of investing success.
This does not mean, however, that it is ever too late to start investing. You can begin investing at any time, but the later you leave it, the more committed you have to be to catch up to achieving your goals as you have a shorter period of time to invest. Begin putting money away for your future today!
How much do you need to start investing?
Of course, the right time to invest also depends on your particular circumstances. Contrary to what most people think, investing is not only for rich people with plenty of money; you can get started by investing with just a small amount of money. An ARM Discovery Fund Account, for instance, allows you to start investing with as little as N10,000.
Investing little and often can considerably increase your returns over the long term. It allows you to take advantage of increases in interest rates and reductions in share prices.
The objective of investing is always to grow your capital, and get the best return you can. However, there is a very important element to consider in risk. Most investments carry with them the possibility (sometimes high and sometimes low) of you losing money. With equities, the value of your shares can go up or down. So if you invest in equities, you accept the risk that you may lose money. If you invest in bonds, you take the risk that the company may not be able to pay back your initial investment and the agreed interest as well. When you invest in real estate, you accept the risk that the value of the property could fall.
You could decide that you do not want to invest in any of these and keep all your cash in a bank account. But this option also does not mean that you are not taking any risk. There may be less risk of the value of your capital falling, but the interest you will get on your deposit in the bank will be immaterial compared to the value you could lose through inflation.
There is a direct opposite relationship between risk and reward. The lower the risk you accept, the lower the return you can expect to achieve. However, this does not mean that you should always go for the highest risk option. You should always go with the level of risk you are most comfortable with, keeping in mind your investment goals, how long you are prepared to wait for your investment to grow, and how much of your investment you are prepared to lose.
The best way to manage risk is by ensuring that your financial planning spread your investment across several companies, asset classes, sectors, and maybe even countries. By placing your capital in different companies, you ensure that if the value of one company drops, the loss may even be offset by good performance of another company.
By investing in different asset classes, you are also able to spread your risk to take advantage of high returns in one asset class and shield yourself against losses in another as the financial environment changes. The same goes for sectors and countries.
Remember that all investments and even the ‘safest’ ones do possess a degree of risk. So make sure you choose a range of investments that best suits you.
An asset class is a group of securities with the same characteristics, especially with regard to risk. There are three main asset classes – equities, bonds and cash. Some professionals also add real estate and other commodities like art and gold when discussing asset classes. Apart from varying levels of risk, each asset class also has a different potential for delivering returns in various market conditions.
Why do we need to know about asset classes?
It is essential that you know the characteristics of the asset that you are investing in, so you are able to adjust your expectations accordingly. The financial landscape is always changing, so knowing about the different asset classes and how they are performing currently can help you plan how to invest your money. You have to understand the risk and rewards characteristics of any asset you want to invest in, and ensure that it is in line with your own needs to make an appropriate decision for you.
Types of Asset Classes
Equities (also called stocks or shares) are issued by companies and some are traded on the stock market. When you invest in an equity, you buy a share in a company, and become a shareholder. You can make money from equities in two ways: growth of your capital when the share price increases, or you can receive income in the form of dividends. Neither of these is guaranteed and there is always the risk that the share price will fall below the level at which you invested. Also, past performance of a stock does not guarantee future performance. Equities generally are more unpredictable in the short term, but they have historically outperformed other investments.
Bonds (also called fixed income or debt) are loan instruments issued by governments and companies to raise money. When you buy a bond, you lend money with the purpose of receiving interest. Bonds usually pay a set rate of interest at regular intervals over a given period, thereby giving you stable returns and steady income, and return your capital after the set period. They are more stable and have lower risk than equities, but typically, also deliver lower return over the longer term. However, they are not all risk-free; if you invest in bonds that are not guaranteed by governments in stable economies or companies with a good track record and health, you face the risk of non-payment of both your interest and capital. The value of bonds are sensitive to changes in both interest rates and inflation.
Money Market Instruments
Money Market instruments are relatively safe short-term investments aimed at preserving capital and providing steady income based on general interest rate level. Such investments can be made in treasury bills (government securities), bankers acceptances and commercial papers. Money Market Instruments typically have lower risk and return than equities and bonds, and are usually geared towards investors that are risk averse. However, as they usually offer lower rates of return, they are not advisable for investors that would like to grow their capital in the long term. The best thing about money market instruments is that they are very liquid which means that investors can withdraw their money whenever they want.
Real estate can be land or property. You can invest in real estate to live in or for investment purposes — apartments, rental houses, office buildings and malls all generate income through rents. Values tend to rise and fall more slowly than stock and bond prices. Real estate helps to protect against inflation as property values and rental income typically rise faster than inflation, but is subject to a number of risks including liquidity and marketability.
Which asset class should you invest in?
Asking the question, “What asset class is the best investment?” is like asking if vanilla is a better flavor than chocolate. There is no correct answer because the best investment actually depends on your personality, preferences, and needs. The specifics of the individual investment also have a lot to do with your investment profile – so what you always need to keep in mind is your investment goals, investment horizon and risk appetite.
Nevertheless, most financial experts agree that the best investment strategy is to spread your investment across broad asset classes to reduce your risk. This is because a fall in the return of one asset class due to market conditions may not affect you as much. You can do this by investing in a mutual fund that invests in the different asset classes, but be sure to choose a fund with a mix (in terms of the ratio invested in each asset class) that is right for you.
A ‘mutual fund’ is a pool of money from different people with the same objective. It gives you access to opportunities to grow your money that you wouldn’t normally have access to if you didn’t have a lot to invest.
Your money is pooled together with that of other investors, and spread over a range of asset classes such as bonds (and money market instruments), equities and cash. The collective assets in the fund are called a portfolio, and they are managed by an experienced fund manager on your behalf. For this service, the fund manager charges a small annual fee known as a management fee.
Your investment in the fund is divided into shares, and the number of shares held represent your ownership stake of the fund’s overall assets, and the return those assets generate. The prices of these shares will fluctuate daily as the underlying value of the assets rises and falls, and your individual stake will rise and fall accordingly.
Who should invest in a Mutual Fund?
Mutual funds are a great way to invest:
- If you are looking to build a nest egg for the future
- If you can only invest a small amount at a time
What are the key benefits?
- Lower risk because your money is spread over different companies and asset types. When the value of one asset in the fund falls, another may rise. This means your risk overall is significantly less than when you put your money in a single investment.
- Better rates because by pooling money with other investors your combined buying power is greater than if you invested on your own and you have access to some assets and markets that you would not have if you were investing smaller amounts on your own.
- Reduced costs because some costs and charges are spread across all investors in the fund. Therefore, you can carry out large transactions for much lower cost than if you were buying the assets directly.
- Saved time and effort with an experienced manager who invests on your behalf. Your money is managed by a professional with expertise and access to market and research information you may not have, who is able to monitor the investment better because it is his full-time job.
- Easy access to your money by being able to cash in your investment at any time. You can make additional contributions or withdrawals to your investment whenever you want.
- Simple to use and monitor. You can make automatic transfers to or from your bank account, and check your fund’s performance figures conveniently online. You also receive regular reports on how your money has been invested, and can choose whether you want your returns to be paid out as income or automatically reinvested.