By Lloyd Onaghinon
Having reviewed the various aspects of value creation and growth, from consumption to savings, spicing it up with conversations on inflation and other people’s monies, invest wisely, the one aspect we deliberately left till now was investment. All the areas we have talked about enables us understand investment better. The foundation of creating wealth is investing in yourself.
Research has shown that, the average inflation between 2005 and 2015 was 10.49% (note that the average year on year change for the same period was 4.71%). However, many of us invested in stocks in the market. Many people adduce different reasons for this including savings, wealth generation, understanding of that market, etc. The All Share Index for the same period mentioned earlier achieved a year on year return of 8.03% (the return between 2009 and 2015 including dividend yield achieved 6.58%).
This means that if you had invested in the stock market directly in all the shares e.g. through an index fund over the past ten years, you would have lost value because the average inflation rate was higher than the average return achieved for the same period. The implication is that you would have destroyed value as it is often referred to in finance parlance.
Target using higher benchmark than inflation: Investment is supposed to be done with a lot of focus as it is your excess you seek to preserve. Have a bench mark, opportunity cost or a focus that enables you determine if you are creating value or not. In this case, using inflation as the typical target at the minimum, if you put money in a business and the return you make is not higher than the inflation rate, you have not made money. Typically you should therefore be targeting using a higher benchmark than inflation. It is therefore about ensuring that you are generating increasing wealth compared either on a national scale or a global scale. If on a global scale you will likely have to build in currency devaluation.
Invest Smartly: Your savings (which is the capital you want to invest) is your sweat and a part of you. You worked hard and smart to get the money you seek to invest. Therefore you must seek to invest same appropriately. There is no need putting that money in a venture that will not achieve your target desires. The first lesson is therefore not to invest your money in anything you know nothing about or you do not trust will give you the expected return you seek to achieve. To be that certain you will need to build your knowledge base or understand that business well enough to mitigate the various risks that could work against achieving your target.
Don’t spend your profit: The focus here is that you should never use the funds you want to invest for personal use and neither should you spend the profits or returns achieved for personal consumption but you must be disciplined enough to take the profits and plough it back into another business that will continue to yield profit.
Understand the Deal/Business: There are various initiatives from stocks to bonds, treasury bills, deposit accounts with banks, real estate and businesses in various sectors. The focus must be that you understand the operation of the fundamentals of these initiatives, products and businesses, to be able to grow the investment in a manner that it grows year on year over and above the cost of the money (which is at the minimum the inflation rate). The one thing you must never forget is that you invest to generate positive returns, grow wealth and pass same on to the next generation that will also multiply the wealth.
We will in the future take on specific sectors and drill down on specifics to look out for.