If saving is the act of putting money aside, investing is the act of putting that money to work so it grows over time. Investing is about making your money earn more money. It typically involves buying assets (things of value) that can generate returns (income or appreciation in value). While saving often focuses on safety and liquidity, investing usually accepts a bit more risk in exchange for the potential of higher returns.
Investing is crucial for wealth creation and beating inflation. As we noted, simply saving in cash under the mattress will lose value due to inflation. Even a basic savings account might just keep pace or lag behind rising prices. To truly grow your wealth and meet long-term goals (like retirement or buying property), investing is key. It’s how you can turn, say, KSh 100,000 today into several hundred thousand in the future. Think of it as planting a tree – you sow seeds (money) into assets that, if well-nurtured, will bear fruit (returns) later.
In Kenya, investment opportunities are diverse, ranging from traditional assets like land and real estate (very popular culturally) to modern financial instruments like stocks and bonds, as well as collective schemes like unit trusts and SACCO shares. With improving financial inclusion, more Kenyans now have access to investment platforms – e.g., you can buy government bonds via mobile (the M-Akiba initiative allowed purchase of bonds through M-Pesa in small denominations), or buy shares on Nairobi Securities Exchange (NSE) through mobile trading apps provided by brokers. Additionally, there’s growing awareness of investing for goals such as education, thanks to products like education policies and the collective investment schemes.
However, investing comes with the mantra “know before you go.” It requires education and due diligence because investments can fluctuate in value. Unlike a fixed savings account where your principal is secure (except perhaps if a bank collapses, which is rare and even then there’s some insurance on deposits), investments like stocks can lose value if the market or company performs poorly. Therefore, this section will cover key terms and types of investments, strategies, and considerations to equip you with the knowledge to invest wisely.
Think of investing as the next step after you have some savings and an emergency fund in place. It’s money you won’t need immediately, which can be committed to growing for the future. And one shouldn’t assume investing is only for the rich; even with a few thousand shillings, you can start (for example, you can invest in a money market fund with as little as KSh 5000 or buy a few shares of a company – some stocks on the NSE are priced at under KSh 10 a share, so with KSh 5,000 you could buy 500 shares). The key is to start small, learn the ropes, and build over time.
Ultimately, successful investing can help you achieve financial freedom – where your money generates enough returns that you could live off those returns or have significant financial flexibility. It’s how you make the jump from just earning and saving money, to having your money earn more money for you. With that in mind, let’s demystify some of the jargon and concepts around investing.
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Assets: Investors typically put their money into a variety of assets, such as stocks, bonds, real estate, commodities, mutual funds, and more. The choice of assets depends on your financial goals, risk tolerance, and investment horizon.
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Risk and Return: One of the fundamental principles of investing is the trade-off between risk and return. Generally, assets with higher potential returns tend to carry higher levels of risk. It's crucial to understand your risk tolerance and how it aligns with your financial goals.
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Diversification: Diversifying your investments means spreading your money across different asset classes and investments to reduce risk. Diversification can help mitigate the impact of poor-performing assets on your overall portfolio.
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Investment Horizon: Your investment horizon is the length of time you plan to hold an investment. It can range from short-term (months to a few years) to long-term (decades). Your investment horizon influences the types of assets you choose.
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Goals: You should have clear financial goals when investing, whether it's saving for retirement, buying a house, funding your children's education, or simply growing your wealth. Your goals will guide your investment strategy.
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Asset Allocation: Asset allocation involves deciding how to distribute your investments among different asset classes. It is a critical decision that can have a significant impact on your investment portfolio's performance.
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Research and Analysis: Successful investors often conduct thorough research and analysis to make informed decisions. This may involve studying financial statements, market trends, and economic indicators.
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Risk Management: Risk management strategies, such as setting stop-loss orders, using hedging techniques, or having a well-diversified portfolio, help mitigate potential losses.
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Compounding: Compound interest is a powerful force in investing. It allows your investments to grow not only on the initial principal amount but also on the gains or earnings from previous periods.
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Costs and Fees: Be aware of the costs associated with investing, including brokerage fees, management fees, and taxes. Minimizing these costs can have a substantial impact on your returns.
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Monitoring and Adjustments: Regularly review your investment portfolio and make necessary adjustments based on changing market conditions and your financial goals.
- Volatility: The degree of price fluctuation in an investment.
- Capital Gain: The profit from selling an asset at a higher price than you bought it.
- Dividend: A portion of a company’s profits distributed to shareholders (usually per share)
- Treasury Bills (T-bills): Short-term government debt instruments (91-day, 182-day, 364-day). You buy them at a discount and get full face value at maturity (the difference is the interest).
- Bonds: These are debt instruments. When you buy a bond, you are lending money to the issuer (could be government or a corporation) who promises to pay you interest (coupon) regularly and return the principal at maturity
- Equities (Stocks/Shares): Represent ownership in a company. If you buy shares of, say, Equity Bank, you become a part-owner (shareholder) of the bank. Equities are traded on stock exchanges (in Kenya, the NSE). They offer returns through price appreciation and dividends (a share of company profits paid out to shareholders). They are considered higher risk because company performance and market sentiment affect their price.
- Diversification: A risk management strategy that involves spreading investments across different assets or sectors so that a loss in one is offset by gains/stability in others.
- Portfolio: The collection of all your investments.