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      Home Columns Let's talk about your wealth

      An introduction to the principles of investing

      mm by Olusegun Omoniwa
      September 9, 2022
      in Let's talk about your wealth
      Reading Time: 3 mins read
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      An introduction to the principles of investing
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      “An investment in knowledge always pays the best interest”– Benjamin Franklin 

      Over the next few articles in this section, the aim to start or support many of you reading this on the journey of managing, growing, and protecting your wealth with useful tips and insights. Knowledge is a big differentiator and the experience others can either help avoid the negatives or repeat the positives.

      To manage or grow your wealth you must make investments. Managing your wealth well is like tending a beautiful formal garden – you need to start with good soil and a good set of tools. Just as good soil has the proper fertility to nourish a plant, having the right foundation in financial literacy should empower you to potentially cultivate a successful investment portfolio through the ability to make the best-informed decisions.

      Ask yourself:

      • What are my needs and aspirations in life?
      • What financial goals and targets do I need to set to meet those needs?
      • How do I develop an investment strategy to realize these objectives?

      Once you have answered these questions, you will find that investing your money according to a holistic and well-developed plan can be a rewarding experience. It is critical to answer these questions personally and truthfully to avoid the ‘herding mentality that often accompanies a lot of investment decisions we make in life. We all face a largely individual life journey and this should be fully reflected in the financial decisions we make. For example, the most critical decision any one of us may make would be the decision to purchase a house. For several young people, this may be the largest personal expense item you may make. It, therefore, follows that it should be considered carefully in the context of all the points above as it could turn out that renting a house vs. purchasing one may serve you better even if you can afford to purchase one outright.

      In the area of financial investments specifically, we will be covering 6 principles in this series and for today’s read, we will tackle the first two which are:

      1.Assess your risk appetite 

      Your risk appetite is your tolerance level for positive and negative fluctuations within your portfolio. You need to determine whether you are comfortable with a fair amount of market volatility, or whether you prefer a calmer ride through less market volatility. You should work with a financial advisor to detail your risk profile and inclinations.

      Risk and returns are often related but higher risks do not automatically translate into higher returns. Riskier investments may present the possibility of superior returns, but higher risks in themselves are no guarantee of good performance and they may result in lower returns and loss of your initial investment amount. It is important to note that achieving higher investment returns will, in most cases, require you to accept a greater level of risk in your chosen portfolio. When making your investment decisions, you should invest at a level and pace that you are comfortable with. The right investment decisions are the ones that are aligned with your risk profile, which includes your tolerance of risk.

      2.Diversify your investments 

      Take note of the types of financial markets which include the following – Capital Markets(Bonds and stock markets), Money Markets(short-term debts like treasury bills and commercial paper), Foreign Exchange Market, Insurance Market, and Commodity Market. Examples of Asset Classes and their financial instruments include the following Long Term Debt( Bonds, Loans); Short Term Debt(Treasury Bills and Fixed Deposits); Equity(Shares/Stocks); Foreign Exchange; Real Estate; Commodities(Gold, Cattle/beef, Soybeans, Maize).

      You should incorporate a variety of financial instruments in your portfolio when making your investment decisions. This way, the underperformance of any single investment may be offset by gains made on other holdings. However, you should note that this intended offset of losses in particular investments in gains from other investments may not always be achieved but this is a time-proven strategy to follow. An effective way to diversify is to build a portfolio across a variety of financial instruments, such as cash, securities, or derivatives, that provide exposure to a variety of financial markets and asset classes.


      In our next article, we will continue on this subject and cover the other four principles of investing in detail.


      Olusegun Omoniwa is the Head of Wealth Management at Standard Chartered Bank Zambia Plc. Through its Financial Markets teams and in partnership with asset management firms and insurance companies, the Wealth Management team provides a range of products and solutions to help our clients grow and protect their wealth. Our clients span the full spectrum, from individuals to small businesses and corporate clients. We have teams of Investments Advisors, Insurance Specialists, and Treasury Specialists who interact with clients, and Relationship Managers who provide expert insights on local/global markets and specialist advice. 

       

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