What you need to know:
- Understand the investment better by carrying out due diligence around that particular investment vehicle.
- If, for instance, you are buying shares, then you are either going to earn money through dividends or shares, which will appreciate in value over time.
You have saved some money and are now looking for an investment that will fetch you a good return, or you have borrowed money to invest and therefore have an obligation to repay your debt.
If you pick the wrong investment, you may not get the profits that you anticipate, or in some situations, you may find the capital you invested either diminishes or gets completely wiped out with nothing to show for it.
Before it gets to that point, here are the few mistakes that budding entrepreneurs make, which, if avoided, could see them reap full benefits from their investments.
Lack of knowledge about the investment
Simon Gathecah, who runs financial consultancy firm Pearl Insight, says the first mistake people make when getting into an investment is failing to understand how that investment will earn them money.
This could happen perhaps because it has been over promoted on social media and everyone is eager to make a quick buck.
“There are some investments that are too complicated for laymen to understand. When they are being promoted, however, they sound so easy to make money from and so straight forward, for instance cryptocurrencies or pyramid schemes, however, when you ask someone to explain how money is made out of it, the answer they give will show that this person does not know what they are talking about,” says Gathecah.
He explains you could understand the investment better by doing some due diligence around that particular investment vehicle. If, for instance, you are buying shares in the Nairobi Securities Exchange, NSE, then you will know that you are either going to earn money through dividends or the shares, which will appreciate in value over time.
He says it is also always good to know the people behind the investment. If, for instance, you are investing in an already established business, it is important to know where the business is located, and how the business is run and managed. Should anything go wrong, then you would know whom to ask a question about your investment.
“That’s why you see companies listed in the NSE calling for annual general meetings to give an account of how the company is performing to their investors, their shareholders,” he notes.
He says that if you are an SME looking to invest in a chama or Sacco to purchase property collectively, then you should do some due diligence around who is behind the union to ensure that it is stable, and also have a contact person that you can reach should the need arise.
“There are many developments coming up, with sales people handing out flyers on traffic advertising housing units, before you invest your money in any of them, you need to find out who is behind the developments and their track record because some of them end up becoming schemes,” he advises.
He says the other pitfall many budding entrepreneurs fall into is impatience. Most investors, for instance, will bail out on an investment because they did not double their money in a certain period of time, which is usually just a few weeks or months.
“Ideally, you should hold investments for as long as you can to maximise your returns,” he notes, adding that it is also important to know how long you should hold your money in your preferred investment vehicle before you can liquidate it.
“Someone who has, for instance, decided to invest in a fixed deposit account should know that they will get a certain return percentage depending on the institution they are investing in, and that their money will be locked up for a year or so. They can then decide if they will continue renewing their investment,” he notes.
Gathecah points out that timing is everything when it comes to some types of investments such as the stock market, and that you should always be on the lookout not to invest when it is too late. If it is shares for example, you can time when there is an Initial Public Offering or when the stocks in the market are open. He, however, adds that not all investments rely on timing.
“Successfully timing the market is extremely difficult. Even institutional investors often fail to do it successfully, therefore the best approach to take is to know that the opportunity is indefinite.”
Allure of a quick return
Gathecah points out that the other mistake many investors make is falling for the allure of a quick return. A financial institution for instance may give you a fixed deposit rate which is higher than the lending rate.
“When the deal is too good, think twice. You can’t have a solid institution promising you a fixed deposit return that is far much higher than the lending rate because that would mean that you can borrow to invest in the fixed deposit,” he argues.
Investment which has no regulator
Michael Thotho, a programs manager at financial advisory firm, Centonomy, says another mistake to avoid as an investor is selecting an investment vehicle which does not have a regulator who can assure you that your money is safe.
“When you hear a regulator dissociating themselves with an investment, like for instance when Central Bank dissociated themselves with the Bitcoin, you need to be very careful because you are putting your money in a vehicle with no law to protect you in case your money is lost,” notes Thotho.
Investing based on your emotions
Thotho says investors should not let fear or greed control their decisions. Instead, they should focus on the bigger picture. Stock market returns for instance may deviate wildly over a shorter time frame, but over the long term, there is a certain average return if you invested in solid stocks. He says that over a long period of time, a portfolio's returns should not deviate much from those averages.