Introduction
Selecting the right investment strategy is a pivotal decision on the path to success in investing. We will explore the crucial factors that should weigh into your considerations when choosing the most suitable investment strategy to align with your unique financial goals and preferences.
1. Your Financial Goals: What are you investing for? The goal will influence the appropriate investments and strategy.
For example, if your goal is to build a retirement fund 30 years from now, you can afford to take more risk and focus on growth since you have time to ride out volatility. If your goal is to save for your child’s high school fees that are 5 years away, you might prefer safer, medium-term investments (like bonds or a conservative balanced fund) to ensure the money will be there when needed.
Clearly define your goals: amount needed and time horizon, then match the investment to that. Short-term goals (<=3 years) usually = low risk, high liquidity (savings accounts, MMFs, T-bills). Medium (3-7 years) = moderate approach (maybe a mix of bonds and some equity). Long-term (7+ years) = can lean more aggressive for higher returns (more stocks, real estate, etc.).
2. Risk Tolerance: This is your emotional and financial ability to handle losses or volatility.
Some people can’t sleep if their investment drops 10% in value; others are unfazed by a 30% swing. Be honest with yourself. If you are very risk-averse, you might stick to safer investments (even if returns are lower) like government bonds, MMFs, blue-chip dividend stocks, etc.
If you can stomach risk, you might be okay with volatile stocks or even alternative assets. Also consider your financial cushion – someone with a secure job, emergency fund, and no debt can take more investment risk than someone who is financially fragile.
A common approach is a “risk questionnaire” that places you on a conservative to aggressive spectrum, which many financial advisors or investment firms use to recommend a portfolio. As a rule, never invest in risky assets money that you cannot afford to lose or lock away for a while.
3. Time Horizon: Related to goals but worth emphasizing: How long can you keep the money invested?
If you’ll need it back soon, you should not put it in something that could be illiquid or volatile in the short term.
For example, stock markets can be unpredictable year-to-year but tend to trend up in the long run; thus, stocks are more suitable for long horizons. Real estate is similar – great over a decade, but you might not be able to sell at a good price exactly when you need within a year.
or short time frames, stick to short-term bonds or cash-equivalents. Also, the longer your horizon, the more you can benefit from compounding, so starting early even with small amounts is powerful.
4. Diversification and Asset Allocation: Consider how different investments fit together in your overall plan. You generally want a mix (unless your amount is very small and you’re just starting with one thing).
Diversification reduces risk. So think about asset allocation – what percentage in equities, what in fixed income, what in others – that aligns with your situation. Younger investors often allocate more to equities (say 70% stocks, 30% bonds).
Older or more conservative ones might do the reverse. If you already have a lot of exposure to one type (e.g., you own a lot of property), maybe diversify financial assets into stocks or funds rather than buying yet more land.
5. Economic Conditions and Market Trends: While you shouldn’t try to time the market perfectly, being aware of the economic cycle can inform some choices.
For instance, if interest rates are very high and stocks are down (maybe in a recession), that might be an opportunity to buy stocks at a bargain (if you believe economy will recover). Or if property prices are in a bubble (super high), caution is warranted.
In Kenya, keep an eye on things like the Central Bank Rate (affects bond yields and loan rates), inflation (affects real returns), and sectoral trends (e.g., if oil prices skyrocket, transportation stocks might suffer but renewable energy might gain attention). Also consider any regulatory changes – e.g., when the rate cap law was introduced in 2016, bank stocks fell (as it limited their interest spreads), which was a factor to consider then.
6. Knowledge and Access: Invest in what you understand or are willing to learn.
If you have no clue about stocks, either educate yourself or use a managed fund rather than blindly picking shares. If you’re knowledgeable about real estate (maybe you work in construction or have family in land business), you might do well there. Also consider access: some investments require higher minimum capital (e.g., buying an apartment to rent requires millions, whereas unit trusts require thousands).
Start with what is within your reach and comprehension. Over time, as you learn and your capital grows, you can expand into other areas.
7. Liquidity Needs: We mentioned liquidity before but in strategy it means: do you anticipate needing to convert investments to cash for any reason soon?
If say you might move abroad in 2 years or need to finance an MBA, you’d ensure some of your portfolio is easily sellable by then. Or if you’re nearing retirement, you’d start shifting some growth investments into income/liquid ones to draw from. Always match the liquidity of assets to your potential cash flow needs.
8. Tax Implications: Different investments have different tax treatments which can influence net returns.
For example, interest from bank deposits is subject to 15% withholding tax. Dividends from stocks have a 5% withholding tax. Capital gains tax is 15% on property gains (and might be reintroduced on stocks someday).
However, some things are tax-advantaged: certain infrastructure bonds are tax-free on interestbusinessdailyafrica.com. Also, investing via a registered pension scheme or insurance-linked investment might offer tax relief on contributions.
While taxes shouldn’t drive the entire strategy, they’re a factor – e.g., if two investments have similar gross return, you’d prefer the one with a lower tax bite. It’s worth noting that Kenya’s taxes on investment income are relatively straightforward and withheld at source in many cases, but planning (like holding a tax-free infrastructure bond) can improve after-tax yield.
9. Inflation and Real Return: Always consider the real (inflation-adjusted) return of an investment.
If a bond yields 10% but inflation is 8%, the real return is ~2%. If a stock gave 5% return but inflation was 5%, you just broke even in purchasing power.
For long-term goals, aim for investments that historically beat inflation by a good margin (equities, property usually do, fixed income usually just slightly above inflation). Factor in expectations of inflation – if we anticipate higher inflation, you might lean towards assets that can adjust (like property rents can increase, stocks’ earnings can grow with inflation, whereas fixed-rate bonds get relatively less attractive in high inflation).
10. Current Financial Position and Debt: If you have high-interest debt (like credit card or mobile loans at, say, 14% or more per annum), it often makes sense to clear those before investing aggressively, because paying off a 14% loan is like getting a guaranteed 14% return (risk-free) – few investments will beat that consistently.
So factor in if you should settle certain debts first. Once high-interest debt is managed, ensure an emergency fund (to avoid going into debt again for emergencies) – then invest. Your strategy should not jeopardize your basics; e.g., don’t invest rent money in stocks hoping to double it and then not have rent. Invest surplus that you won’t need for necessities.
In making a strategy, many find it useful to consult a financial advisor or use resources from institutions. For example, some banks and investment firms in Kenya offer advisory for free or a small fee if you’re investing with them. They can help align your strategy with these factors professionally. But even on your own, regularly review your portfolio – maybe annually – to see if it still aligns with your goals and risk profile. Life events (new job, marriage, kids, nearing retirement, etc.) may necessitate strategy shifts.
Conclusion
Investing is an exciting and vital part of the financial journey. By now, you should have a broad understanding that investing is not a one-size-fits-all endeavor – it’s highly personal, depending on one’s goals, risk tolerance, and time frame. The Kenyan investment landscape offers many opportunities: from the safety of government bonds to the growth potential of equities and the tangible appeal of real estate. With mobile technology and financial innovation, these opportunities are more accessible than ever (imagine, our parents had to physically go to stockbrokers or rely on land as the main investment, while we can trade stocks on our phones or invest in a unit trust via M-Pesa with a few clicks).
A crucial takeaway is the principle of balance: balancing risk with reward, short-term with long-term, and diversifying to protect against uncertainty. One quote from a famous investor, Benjamin Graham, is apt: “The individual investor should act consistently as an investor and not as a speculator.” In other words, base your decisions on careful analysis and strategy (investor mindset), not on hunches or herd behavior (speculator mindset). For example, don’t buy a stock just because everyone on Twitter is hyping it; do it because you’ve studied the company or trust the fund manager who did.
Remember that investing is a learning process. You may make a few mistakes – perhaps you picked a stock that didn’t perform or you sold something too early or too late. Each experience, as long as it doesn’t wipe you out, teaches you and hones your strategy. Start with smaller amounts while learning, and as confidence and knowledge grow, ramp up. Leverage the wealth of information out there: read financial news (Business Daily, for instance, for local marketsbusinessdailyafrica.com), follow market reports from CMA or investment firms, maybe join investment clubs or SACCOs where discussions happen, and keep an eye on global trends that could affect us (like oil prices, as Kenya imports oil, or global economic shifts).
Also, be aware of investment fraud or pitfalls: Unregulated “investment clubs” promising huge returns, or tips that sound too good. Use licensed brokers and platforms (the CMA and SASRA websites list licensed entities). A legitimate opportunity will still be there tomorrow, so you should have time to do due diligence – fraudsters often pressure you to “invest now or miss out!” which is a red flag.
Ultimately, the power of investing is in harnessing the money you’ve saved to work for you. It’s how people elevate their financial status from just getting by to creating wealth. Imagine the possibilities: dividends paying for your annual holiday, or your investment fund eventually buying that dream home, or by retirement you have enough in investments that you continue earning even when not working. Those outcomes are achievable with prudent investing.
In closing this section, reflect on one more local saying: “Biashara ni riziki.” While it literally refers to business being a source of livelihood, we can extend it to mean investments (biashara or any venture) are a source of provision if well-managed. Approach investing as you would a business – with knowledge, patience, and diligence – and you set yourself on the path to financial growth. Now, having covered both saving and investing, you’re in a great position to understand when to use each – which leads to our next topic: Saving vs Investing, and how to balance them in your financial plan.