How to make informed investment decisions
By Claire Hobbs
Chief Treasurer at Bank Windhoek
Even for those of us working within the financial markets, investing your own hard-earned money can at times appear daunting.
For the majority of people who are not actively involved in investing, the financial terms and processes can deter you from taking the first step towards making an informed investment decision.
Before investing, you must consider the amount that you are willing and able to put away and for how long you can leave the funds there. It is important that the amount you decide on is affordable to ensure you are still able to meet your monthly commitments.
Consider the goals you are investing towards. Is it a holiday, retirement or making provision for unforeseen expenses? This goal will have an influence on your choice of investment but before you take a final decision, you also need to factor in the expected return and market risk.
The time horizon is the length of time from when the investment is made until the expected time at which it may need to be withdrawn. A short time horizon suggests a conservative investment, whilst a longer time horizon indicates a more aggressive investment stance.
Consider your age, cash flow needs and overall financial position when making your selection. You can divide the investment periods up into shorter than one year, one to five years or longer than five years.
Now consider your expected return. Your investment return expectation is a key driver of your investment goals. Bank deposit rates are considered to offer conservative returns, so to achieve higher returns than bank deposit rates, other types of investments may appear to be a better option, but these can be associated with higher risk. To determine your required return, consider your income needs from the investment, whether you wish to simply preserve the capital of the investment in terms of inflation, or whether you wish to create wealth from the investment with inflation beating returns.
Next, consider market risk. Market risk is the possibility of your investment value decreasing due to fluctuations in the market price of the investment. Generally, the higher the market risk, the higher the expected return. This implies that an investor who seeks higher returns accepts higher levels of price movement- or volatility- in the short term.
The combination of your expected return and your risk appetite will determine the type of product you choose in meeting your investment goals. For example, if you have a low risk appetite aiming for capital preservation with an expectation for a medium overall return, short term money market investment products such as notice deposits, fixed term deposits or Treasury Bills, would be ideal vehicles for your investment.
Where your investment term is over a longer time horizon and you have a medium risk aversion, the general nature of the expected return might be higher but still with a degree of capital preservation. In this case, consider longer-term fixed rate deposits or Namibian government bonds and investments in a diversified range of medium term interest bearing instruments. Investment in a diversified range of capital market instruments is also an attractive option for these investment types.
For investors expecting high income with moderate capital growth, or low income with high capital growth, investments in listed property funds as well as local and international shares would satisfy their risk appetite.
Irrespective of the category in which you fall, you should remain mindful that to save and invest is not only in your own interest but also for those you care about. The golden rule, however, remains; if you do thorough research and keep a clear head, your chances of long-term success increases optimally.