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How to Lose Money While Your Portfolio Rises in Value

By
Irene Makanga
-
0
How to Lose Money While Your Portfolio Rises in Value

This purely a speculative piece. Proceed with caution and as always consult your financial advisor before making any investment portfolio decisions.

As an investor, the goal is to be wise as possible about my investments while looking for where others are blind. The idea is to see the risk that others are missing so you can manage ahead of it. Paraphrasing a wise mathematician, risk never leaves the system, it just changes form. So, so as I was doing some studying on Kenya’s current economic and indicators, trying to gauge where we are headed it reminded me of an article. It addressed the issue of making losses when everything seems fine upon face value. Analysts have been speculating for months now on long-term effects of the pandemic and the road to recovery.

If you are interested to learn how you can lose money while your portfolio grows, dive in and read on. The main focus of this article is paper assets – stocks, bonds and other cash-equivalent assets.

The Destroyers of Wealth

For long-term investors, there are three things that can destroy your wealth – a combination of monetary inflation, asset deflation and inflation taxes. As things worsen in the economy, here are is the assumption as specualted by various analysts:

Monetary Inflation Hiding Asset Deflation

Inflation will take place as a result of the oversupply of money and shortages. Thus, the inflation in prices of goods will hide asset deflation in investment value.

Let me explain.

Monetary inflation is the sustained increase in the money supply of in a country. The supply of money within the country will increase, as interest rates fall. Currently, banks are seeing more defaults on loans, and will soon start writing off loans due to the continued strain the pandemic continues to cause. Earlier this year, they had also put a freeze to lending but soon, but I believe will start lending at lower rates to survive.

The fall in interest rates will result in an oversupply of money, and cause a fall in purchasing power of money in real terms. Thus, the prices of goods will increase and predicted shortages will take effect as unemployment continues to bite.

This loss in control over inflation and unemployment will result in a decrease in the shilling value and will hide the decrease in asset value. At this stage though, I am only posing an argument. Hence, this is merely theory and speculation. It is yet to be seen playing out in the real world.

Learn More: How to Make 20% On Dividend Yields Every Year

Asset Deflation & Inflation taxes

We have established that our assets are losing value as a result of monetary inflation. Thus, inflation tax will then make it even worse. Inflation tax refers to taxes paid on non-existent income. The gains perceived to be profits when adjusted for inflation are actually losses. Thus, it will cost you more to hold these assets since it destroys the purchasing power of what remains.

Here is an example of how this can play out:

Period of InvestingAsset IndexValue of
the Shilling		Inflation-Adjusted
Asset Index		Percentage
Change
Beginning1797.6711,798.670%
End2,673.940.61,604.36-11%
“Profit”876.27-194.31
Taxes (5%)-43.81-26.27
After Tax832.46499.48-28%

Learn more: How to Plan Your Investments Against Investment Risk

By And Large

As an investor, it is extremely difficult to outrun this problem. It will also be quite difficult to earn real profit in such a market. Even with the vaccine, the lag time to recovery will be a while. Inflation and unemployment are one of the hardest things to control once out of control. Therefore, the aim is to make a better decision than everyone else in order to make a lot more money to overcome and keep wealth intact. We are entering into a new time of investing that is very different from what we have been through.

Happy Building!

Image credits: To by Olya Kobruseva from Pexels

Article Sources:

  1. Business Daily. “Land, house prices decline on Covid-19 slowdown, https://www.businessdailyafrica.com/bd/economy/land-house-prices-decline-on-covid-19-slowdown-2298312.” Accessed on 05th December 2020.
  2. Kenyan Wallstreet. “Virus Triggers Increased Loan Default in Kenya’s Credit Market, https://kenyanwallstreet.com/covid-19-to-increase-loan-defaults-transunion/.” Accessed on 05th December 2020.
  3. Daniel Amerman, CFA. “The Secret History of A 70% Market Loss – What a Secular Bear Market In the 2020s Could Look Like, http://danielamerman.com/va/ccc/G4SecBear.html?__s=vefa1cmnhevnf4wseixk&utm_source=drip&utm_medium=email&utm_campaign=Todd%27s+picks+-+Are+You+Ready+For+What+Comes+Next%3F.” Accessed on 05th December 2020.
  4. Elizabeth Irungu, CFA. “Kenya to Face Deflation if Economy Continues on Lock Down, https://www.linkedin.com/pulse/kenya-face-deflation-economy-continues-lock-down-irungu-cfa/?articleId=6684788424169295872.” Accessed on 05th December 2020.
  5. Mint. “What History Tells us About Pandemics and Interest Rates, https://www.livemint.com/market/mark-to-market/what-history-tells-us-about-pandemics-and-interest-rates-11594392564791.html.” Accessed on 05th December 2020.
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How to Manage Debt Better

By
Irene Makanga
-
0
How to Manage Debt Better

Manage debt decision better, thereby better manage your debt. The decision to take on debt or not, pay off this debt first or not or even recognizing that you are way over your head in it is only start of the decision points you may face throughout the debt process. The aim is to not be one of those Kenyans buried in 70% interest debt because we didn’t make better decisions.

Let’s not chalk it up to ignorance.

Borrowing

It is not always a good idea to get into debt, however, borrowing sometimes is unavoidable. For instance, you may want to take out a mortgage loan since you don’t have the cash to pay for you house upfront or would hold up too much of your cash. You may also, borrow to complete paying school fees or whatever the pressing need may be at the time. Whatever the case, if you are thinking of taking loan, here are several things you need to do before you borrow.

Note: Without these things, it will cost you.

1. Establish How Much You Need

Borrowing will always cost you money because you have to pay interest. Also, you are committing future unearned income to pay it back, therefore you won’t be able to do other things with you money.

Hence, limiting how much you borrow is important so that you don’t over-commit your unearned income to landers and make it harder for you to achieve your financial goals. Therefore, you’ll need to:

  • Evaluate your need to take out a loan. How necessary is it for you to borrow to say things like a big wedding? You shouldn’t borrow to finance a wedding – just save up and pay cash instead. Therefore, you should only borrow when its pressing or when it improves your financial standing i.e. paying for a house or education.
  • Borrow the minimum. Don’t overextend you need, take out the least amount you need to achieve the goal you need to accomplish.

The goal is to maintain a manageable level of indebtedness and avoid sinking into debt. The last thing you want to do is make debt a major financial problem in your life.

2. Understand the loan product

Before you take out a loan with any financial institution, you need to know and understand the following:

  • What is the interest rate? Consider both flat interest rate and reducing balance calculation methods that the institution may offer.
  • Is the interest rate fixed or flexible? Consider whether you can still afford the loan when the interest rates are readjusted upwards.
  • What is the total cost of the loan? Always request for the loan amortization chart. It will put into focus that actual cost of the loan by providing a full picture of the principal and interest paid to be paid well into the future. You do not want to be one of those borrowers to pays too much for credit or even default on a loan.
  • How long do you have to repay the loan?
  • What are the monthly payments?
  • What fees, if any, will you be charged? Fees can increase the cost of the loan, ensure you understand the fees you are likely to incur at each stage.
  • Will you be penalized for paying off the loan ahead of schedule?

3. Compare Lenders

I understand that you cannot just walk into any financial institution and take out a loan. Most financial institutions will want to first establish a history with you before they can lend to you. you. This is perhaps is one the of primary reasons that people opt takeout loans with non-deposit taking unregulated micro-financers that charge exorbitant fees and interest.

However, lets build options. Have them before we need them.

There are a lot of variations among lenders in terms of rates and fees – banks, credit unions and even online lenders. When you shop around, try to see if lenders will give you details about the loan you could qualify for before making any hardline decision.

Learn More: How To Build A Good Credit Score

4. Budget Repayments

Borrowing means that you commit future unearned income to make specific repayments for a certain period of time as stipulated in the terms of your loan. Therefore, it is essential that before you agree to commit to this level, you can afford to make payments for the entire life of the loan.

Budgeting your payments will help you see whether you can actually afford the loan or not. After you have settled on a lender, take the monthly cost they provided and work it into your budget. Make sure you can easily afford the loan without too much strain or hustle. The last things you want to do is risk defaulting and destroying your credit score.

To ensure that its the right decision, consider living on this new budget for a period before you commit. This will help you see whether you handle it.

Managing Debt

If you have multiple debts with different terms and interest rates, how well do you manage it? Are you looking to reduce the cost of debt or the number of debts? How well do you allocate limited resources to repay the debt? A high level of debt and high-interest rates contributes to financial instability. With high debt and interest, it becomes harder to save for the future and handle emergencies. Therefore, if you are already in debt, the aim is to minimise the cost of that debt.

So what are some of the things we can do to ensure that we are managing our debt optimally:

  • Automate Payments. Why? Intuitively, even the best of us, we are more likely to manage multiple debts in ways that cost us more. Psychologically we are inclined to pay off the smaller debts first as opposed to the debts with the highest cost. This is because we are more motivated to reduce the total number of debts we have rather than reducing the overall cost associated with the debts. Therefore, by automating debt payments we able to remove the human element in our decision making and allocate money optimally.
  • Refinance Debt. This is an easy way to minimize the cost of debt by consolidating it into one. By combining your existing debt of varying interest rates reduces the overall cost of the debt.

Learn more: How to Overcome Debt Fatigue

Reducing Your Indebtedness

When you have a lot of debt, you need to put in a lot more effort to ensure that debt doesn’t take over your life. To so, you’ll need to reduce your need to take on more debt and pay off all existing debt.

  • Set-up an Emergency Fund. Without access to savings, you’ll find yourself needing to borrow to cover emergency expenses. To reduce future indebtedness, you’ll need to work your way to building a sufficient emergency fund to cover emergencies.
  • Make minimum payments. No matter what you do, ensure that you have made at least the minimum payment on your debt. This will keep your account in good standing and help you avoid late fees. Also, try not to miss any payments. When you miss a payment it becomes harder to catch up and may lead to an eventual default.
  • Prioritize High-Cost Debt. Make a list of all the debt you have and rank the debt in order of interest cost. Make minimum payments all the debt, but devote a little more the debt with the highest interest. This strategy will reduce the overall cost of debt held and is commonly referred to as Debt Avalanche.
  • Maintain a budget. Keeping a budget ensures that you have enough money to cover expenses. You can plan ahead and take action early. This will help you avoid taking on debt to meet your monthly expense. A budget can also help you identify extra money with can go towards setting up an emergency fund or pay off you debt faster.

Learn More: How to Get Out Of Debt Successfully

Buried in Debt?

Sometimes we may find ourselves way over our heads with debt and other bills. It is good to recognize that you need help and seek help from a debt relief institution. So, if you find yourself buried in debt, here are some options to dig you way out.

Debt relief options:

  • Debt consolidation. Debt consolidation will simplify your finances to only one payment. It will help you pay off higher interest debts and leave you will lower interest debt.
  • Counselling. If you can’t seem to stop borrowing and think that you have a spending problem. It’s good to seek help and get yourself under control before debt ruins your life.
  • Debt settlement. Not the most desirable debt solution, but works when you are out of options. With debt settlement, you typically make lumpsum amount or multiple payments to settle the outstanding debt paying less than you owe.
  • Bankruptcy. If you can no longer meet your debt obligation to lenders, you can file bankruptcy. When you file for bankruptcy, you discharge your debt and are no longer liable for it. This, however, doesn’t cancel the debt. Instead, a trustee is appointed to manage your assets in order to facilitate repayment of the existing debts.

Learn more: 5 Effective Ways to Get Out of Debt Quickly

Why Don’t People Manage Debt Better?

People manage debt the best way they know-how. They make the best decisions based on the information on hand – right or wrong. The way we make decisions around finance will either set us up on the right path or the wrong path. Psychology and culture play a big role in this. Understanding our proclivities to make x decision over y, will help us forge better decision in the future. Therefore, I want to challenge you to make better decisions and manage debt better from here on out.

Remember high debt and interest contributes to financial instability.

Happy Building!

Image credits: Top by Pixabay via Pexels.

Article Source:

  1. Scientific American. “Why Don’t People Manage Debt Better? , https://blogs.scientificamerican.com/mind-guest-blog/why-don-t-people-manage-debt-better/.” Accessed on 28th November 2020.

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Snowball vs Avalanche: The Best Way to Pay Off Debt

By
Irene Makanga
-
0
wealth architects- debt management

When you don’t have debt, your money can do anything you want it to.

Snowball and Avalanche are two popular debt repayment strategies that people employ when they want to reduce their debt. In this article, we will explain each method and how you can use it to achieve your financial goals and become debt-free.

Debt Snowball Method

The snowball method was developed by Dave Ramsey. It involves making minimum payments on ALL your debt while paying extra on the smallest first, to it out the way before tackling the larger debt. This method is the most popular debt reduction strategy and has been proven to be successful for many. The focus of this method is to build momentum in eliminating debt.

Here is a quick breakdown on how the snowball method works:

  1. Make a list of all that you owe, arranging it from the smallest to the largest.
  2. Make minimum payments on all your debt except that the smallest ones.
  3. For the smallest debts, pay as much as you can regardless of interest.
  4. Clear the smallest debts, and roll the payments to the next smallest debt balance on the list. Remember, this is in addition to the minimum payments you are already making on the debt.
  5. Repeat this until you are making large snowball payments on your largest debt.

Snowball Method Example

Let’s take Ksh 100,000, spread over four debts with varying interest. Let’s also assume we have an extra 6,000 in the budget that we make towards eliminating our debt, thus making a total payment towards the debt of 32,000 each month.

Month 1:

Mobile App: 10,000 at 24% interest (5,000 minimum payment) + 6,000

Credit Union: 20,000 at 26% interest. (6,500 minimum payment)

Credit Card: 30,000 at 18% interest. (7,000 minimum payment)

Bank Loan: 40,000 at 12% interest (7,500 minimum payment)

Total paid: 32,000

Month 2:

Mobile App: 10,000 at 24% interest (5,000 minimum payment) + 5,000 PAID OFF!

Credit Union: 20,000 at 26% interest. (6,500 minimum payment) + 5,000 debt 1 minimum payment + 6,000

Credit Card : 30,000 at 18% interest. (7,000 minimum payment)

Bank Loan: 40,000 at 12% interest (7,500 minimum payment)

Total paid: 32,000

Credit union gets paid off, in the month 2 and the process continues until the credit card and bank loan is completely paid of.

Debt Avalanche Method

On the other hand, we have the avalanche reduction strategy seeks to pay off debt with the highest interest first regardless of the outstanding balance. This approach takes on a more mathematical approach and will save you money in interest payments by targeting high-interest debt first.

Here is a quick breakdown on how the debt snowball method works:

  1. Make a list of all that you owe, arranging it based in interest from the highest to the lowest.
  2. Make minimum payments on all your debt except that the highest-interest debt.
  3. For the highest-interest debts, pay as much as you can regardless of amount.
  4. Clear the debt with the highest interest, and roll the payments to the next high-interest debt on the list. Remember, this is in addition to the minimum payments you are already making towards repaying the debt.
  5. Repeat this until you are making repayments on your low-interest debt.

Learn More: How to Overcome Debt Fatigue

Avalanche Method Example

Likewise, let’s take Ksh 100,000, spread over four debts with varying interest. Let’s also assume we have an extra 6,000 in the budget yet again that were can use towards repaying our debt. Thus, we have a total of 32,000 each month that we can use towards paying out debt.

Month 1:

Mobile App: 10,000 at 24% interest (5,000 minimum payment) + 6,000

Credit Union: 20,000 at 26% interest. (6,500 minimum payment)

Credit Card: 30,000 at 18% interest. (7,000 minimum payment)

Bank Loan: 40,000 at 12% interest (7,500 minimum payment)

Total paid: 32,000

At the end of month one, you’ll be done paying off the Mobile App loan, then move to the second-highest debt. Apply the minimum payment of Mobile App loan plus the 6,000 towards Credit Union. Do all this, while still making the minimum payments on the credit card and bank loan.

Month 2:

Mobile App: 10,000 at 24% interest (5,000 minimum payment) + 5,000 PAID OFF!

Credit Union: 20,000 at 26% interest. (6,500 minimum payment) + 5,000 debt 1 minimum payment + 6,000

Credit Card: 30,000 at 18% interest. (7,000 minimum payment)

Bank Loan: 40,000 at 12% interest (7,500 minimum payment)

Total paid: 32,000

Rinse and repeat until all your debt is pay off in full.

Learn More: How to Get Out Of Debt Successfully

The Differences: Snowball vs Avalanche

  • The avalanche strategy is the toughest because there are no visible quick wins and this now motivating to most people. The snowball method on the other hand allows you to make quick progress, thus works as a motivational program to help you continue paying off debt. If you are feeling overwhelmed by debt, the debt snowball method is the best.
  • The avalanche strategy requires more focus and discipline than the snowball strategy since its less rewarding.
  • The avalanche strategy is the most optimal method. It will save you the most amount in interest costs than the snowball method. If you let the debt with the highest interest sit too long, it will cost you a lot of time and money. So its best to attack it immediately.
  • The snowball method takes a shorter time to clear the debt as opposed to the avalanche method as you are starting from the smallest working your way to the largest debt.
  • The avalanche strategy puts you more in control of your finances. You’ll come to learn more about debt – minimum payments, interest rates and time to pay off etc.

The best way to pay off debt is neither one nor the other. These methods are both great and totally depend on the individual. The psychological aspect of the snowball method cannot be discounted. Debt can be quite daunting. Thus, the quick wins gained from the snowball strategy has helped many keep going and feel good about themselves during their journey to eliminating debt. So, if you can’t pick one or the other, consider a hybrid or opt for debt consolidation.

In the hybrid, you can first arrange the debt from the smallest to the highest, and then sort basest on the highest interest to the lowest interest. For this to work, you must have a heap of debt to tackle. While with debt consolidation, it will only be effective if your monthly payment is reduced by lowering the interest rate you pay.

Learn More: 5 Effective Ways to Get Out of Debt Quickly

Bottomline

The most important thing is that you must commit to paying off your debt. At the very least make minimum payments each month. Eliminating debt takes time and requires a lot of commitment. These tried and test strategies will only help you get there faster or reduce cost. Whatever you choose – consistency over mindset or mindset over consistency – always surround yourself with progressive thinking people that will motivate you to be the best version of yourself.

Happy Building!

Image credits: Top by Pixabay via Pexels.

Article Sources:

  1. Investopedia. ” Debt Avalanche vs Debt Snowball: What’s the Difference? , https://www.investopedia.com/articles/personal-finance/080716/debt-avalanche-vs-debt-snowball-which-best-you.asp#:~:text=The%20debt%20snowball%20method%20involves,in%20lower%20payments%20over%20time.” Accessed on 29th November 2020.
  2. Dave Ramsey. “How the Debt Snowball Method Words, https://www.daveramsey.com/blog/how-the-debt-snowball-method-works.” Accessed on 29th November 2020.
  3. Experian. ” What Is the Avalanche Method: How it Works and When to Use it, https://www.experian.com/blogs/ask-experian/what-is-the-avalanche-method/#:~:text=The%20debt%20avalanche%20method%20is,interest%20rate%20until%20it’s%20gone.” Accessed on 29th November 2020.
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How to Reduce Investment Risk In Uncertainty

By
Irene Makanga
-
0
Wealth Architects - How to Reduce Investment Risk In Uncertainty

I have heard people compare the stock market to a big casino where investors gamble their money away. For me, the stock market is more like quite like a one big poker game. Luck has no place, just good skillfully made decisions and bad decisions. Where the information you have is in the cards you hold. And the information available to all is in the cards that have been dealt face-up on the table and finally, the information that you trying to know but can never really know, is in the cards that the other players have.

In view of this, the question, then remains – How can I make the best decision possible given what I know, what I don’t know and what I can guess?

Investment Risk: “Buy, Hold, and Pray…”?

While investing, do not play the game of luck – essentially buying, holding and praying that things work out. Luck is a short-term friend that can quickly turn to a foe. Rather employ skill in your decision making. Skill will help you prevail in the long run provided you survive the ups and downs of the market. At the end of the day, you can only guess the moves other investors will make or the information they have.

Therefore, when looking at investment risk management as it applies to financial planning, we are referring to the possibility of loss relative to expected return on investment. Thus, the growth of your individual wealth is determined by mathematical expectancy. This can be simply understood as expectancy is equal to the probability times the payoff.

i.e.

Expectancy = probability x payoff

Whereby, the payoff is half of the expectancy equation and is determined by the quality of your risk management. This simply means that the likelihood of growing your wealth increases with its probability.

Strategies to Reduce Investment Risk

While trying to reduce investment risk, you need to convert the uncertainty of investing in an unknowable future into a confident outcome by increasing the probability of payoff.

This can be down by:

Strategy 1: Educating Yourself to Better Estimate Expectancy

Becoming a skilled investor should be your number 1 goal. Getting smarter about investing is one of the simplest and cheapest ways to reduce your investment risk. Knowledge is power and with it comes better decision making and probabilist thinking. You’ll be better equipped to make better decisions with the incomplete information you’ll have on hand.

When you take a few minutes to estimate the potential risk of your investment based on historical performance, you are more empowered to make a better investment decision.

How much loss can you take?

This is managing expectancy. The strategies presented here, all work towards increasing the probability of payoff (reducing risk), therefore increasing expectancy. The better you are able to manage these things, the better you’ll be at building wealth using traditional asset classes.

Therefore, the more you know, the easier it will be to build wealth while lowering risk and increasing expected payoff. From my experience, the greatest investment risk comes from not fully knowing it exists. Thus learning reduces the risk of investing.

Learn More: No Shortcuts. No Cheat Sheet. Expectancy Investing!

Strategy 2: Balancing Risk & Return with Asset Allocation

You cannot completely avoid risk if you want some growth in your portfolio. Therefore, plan the life of your portfolio weights as you gradually transition into retirement using the appropriate asset allocation. Asset allocation can provide the optimal distribution method for each stage that incorporates inflation, tax and market risk factors.

For instance, if your goal right now is to pursue growth, and you are willing to take on risk to reach this goal, you may decide to place more of your assets in stocks. Having portfolio weights of 80% stocks, 15% bonds and 5% cash. And as you move towards retirement, shift your weights to reduce stocks and increase on bonds and cash to lower portfolio risk. The timeframe here is a critical factor to balance the risk and rewards of each asset class.

Risk vs. RewardMarket RiskPotential ReturnOther Risk Factors
StocksHigh short-term market riskHigher long-term returnsOutpaces inflation better over the long run.
BondsLower market riskLower long-term returnsHigh inflation risk over time.
Bond prices likely to fall when interest rates rise.
Money Market
Instruments		Low market riskStableLow potential margin to outpace inflation.
Not insured by deposit insurance corporation or government agency.
Summary of risk and reward of major asset classes.

Note: Past performance doesn’t guarantee future results of a payoff.

Learn More: 3 Paths Of Wealth Accumulation

Strategy 3: Portfolio Diversification

Within your asset classes, ensure your portfolio is diversified. This means that you’ll need to select a variety of individual investments within each asset class to reduce investment risk. It will help lessen the impact of market volatility on your portfolio.

Therefore, seek to buy stocks at least 10 stocks in several different industries to reduce the possibility of loss. If the return of one stock falls, the return on another may be rising, which then offsets the poor performing stock.

Note: this doesn’t eliminate risk, rather increases the probability against investment loss.

Learn More: 9 Biggest Investor Mistakes & How to Avoid Them Like A Ninga

Strategy 4: Dollar-Cost Averaging

Cost averaging is an investment strategy that seeks to smooth out the effects of market fluctuations in your portfolio.

In this approach, you apply a fixed amount towards the purchase of stocks, bonds or mutual funds at regular intervals. As a result, you purchase shares when prices are low and fewer shares when prices are high. Over time, your average cost per share will usually be lower than the average price of those shares.

This strategy can result in better average share price than trying to time your purchases. See the illustration below:

Monthly IntervalsShare PriceInvestmentShares Purchased
January51.5010,000194.17
February50.3010,000198.81
March53.4510,000187.09
April45.2010,000221.24
May38.9510,000256.74
June42.6510,000234.46
TOTAL47*60,0001,292.51
For illustration purposes only

* Ksh 47 is the average price per share. Ksh 46.42 is the average cost per share using dollar-cost averaging.

Learn More: What is a Mutual Fund and How to Invest in them?

Strategy 5: Buying Undervalued Assets

We naturally seek the prices for everything we purchase, so why not do the same for the investments we make. The price you pay on an asset determines how much you can potentially make once you decide to sell it. Wealth is created where you buy an asset well below the market value, and sell it later at its market price.

Undervalued assets tend to have lower investment risk, as you naturally capitalizing buying bargains to reduce risk and enhance wealth. This strategy is great for both stocks and real estate.

Learn More: How to Evaluate The Quality of a Stock for Long-Term Value Investing

Key Takeaways

  • Be cautious and make the best investment decisions based on concerns about gains and losses. With every loss or gain, you will learn the pitfalls of your own decision making. You will learn to rise above the noise and embrace uncertainty rather than fear it.
  • Frequently review your asset allocation and diversification strategy to ensure that your risk level matches your reward with your long-term investment goals.
  • Adopt dollar-cost averaging to smooth out the effects of market volatility over time and since its systematic, it will help remove the emotions from your financial decisions. Life can get quite random: the stock market crash of 2008 and the COVID-19 pandemic of 2020. It doesn’t help to think too much about it or dwell in it.
  • Think like a victor: I made the best decision given the information I had at the time. The outcome may not be ideal but made the best decision given the information on hand. Plant seeds of resilience and be able to overcome and maintain a ready mindset.

Focus on your decision making process, not luck.

Happy Investing!

Image credits: Top by Clifford Photos from Pexels

Disclaimer: This information is provided to you as a resource for informational purposes only.

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How to Evaluate and Manage Personal Financial Risk

By
Irene Makanga
-
0
Wealth Architects - How to Evaluate and Manage Personal Financial Risk

While we continue to go through life, our economic stability continues to change. We constantly face the risk of uncertainty or possible financial loss. I am a great advocate of stability, which is only possible with good health and financial wealth. Therefore, this makes the evaluation of personal financial risk and management critical.

This article serves as a guide to help you evaluate, plan and manage your own personal financial risk. A good risk management plan can help you manage your exposure to uncertainty and financial loss, which can be achieved by identifying major risks and determining suitable ways to manage them.

Personal Financial Risk And Mitigation Options

Here are some risk factors and options to consider while managing your personal financial risk.

And as always, there information presented in this article is for informational purposes only. Therefore, please consult with your financial advisor before making financial decisions.

Healthcare Costs

It is not uncommon for families to be left in financial ruin when a loved one becomes critically ill. We have the most unreliable medical system that continues to demand more for us than it can offer. What’s worse, the cost of medical care is rising every day and the government is unwilling to ensure quality care is available to all through universal healthcare.

Thus, medical expenses and funeral expenses will continue to erode the wealth and safety net of many families and compound their economic fragility.

Proposed Solutions:

Therefore, to adequately mitigate this risk you’ll need both financial and non-financial solutions in order to position your investment portfolio for the long-term. Even with the best medical insurance, which can be quite expensive, not everything is covered. Therefore, you’ll need the following:

  • Good medical insurance that you can afford.
  • A financial cushion for uncovered medical costs.
  • Take on a healthy lifestyle by incorporating daily exercise, proper nutrition and preventive care

At the end of it all, we are seeking to reduce the potential hit to your finances by staying healthy.

Premature Death

The premature death of a breadwinner can seriously set back a family financially. The financial goals of a family can completely come to halt. It becomes quite difficult to secure the children’s future or the family’s retirement without a consistent flow of income from the breadwinner. Therefore, to ensure peace of mind, no matter what, you’ll need careful introspection and analysis to manage this risk.

Proposed Solution:

To manage this risk, you’ll need to take on life insurance. Life insurance is a risk tool that can be used to transfer the financial risk of a family, in case of the holder’s untimely death. You can choose to either take on term or permanent life insurance. Term insurance tends to be less expensive but doesn’t guarantee lifetime coverage. You can estimate your death benefit in simple terms as equal 10 to 18 times your yearly gross earnings.

While you do so, consider your financial position and other assets, which may reduce the amount of life insurance you may need. Also, remember that the cost of life insurance increases as you get older, as the probability of death increases with age.

Lean more: How Much Life Insurance Do You Actually Need?

Becoming Incapacitated or Unable to Work

As life happens as it always does while working in high-risk jobs or going about life, you may find yourself incapacitated or unable to work due lose of ability to perform everyday tasks.

Proposed Solutions:

Disability insurance and long-term care insurance, are two main insurance products to help through situations like these.

  1. Disability Insurance for when you are left incapacitated. This form of insurance insures the owners earned income against the risk that disability creates i.e. preventing you from performing your normal work duties.
  2. Long-term care insurance coverage for when you are unable to work and need specialized care. Another more affordable alternative to this is an annuity with an income benefit rider that lasts the owners lifetime.

A great policy that replaces at least 60% of your earnings during the working years will go a long way.

Learn More: Is Whole Life Insurance a Good Investment?

Outliving Your Money

Outliving your money is quite a big risk for those without proper financial planning. A proper financial plan will help you nail down your budget and estimate how much you’ll need to last your lifetime. It takes into account various factors such as interest rates, savings and inflation to get a realistic figure.

There are many ways to avoid outliving your money, however, I will only focus on the simple insurance and investment products that pay a series of guaranteed payments during your lifetime. How much you get paid is entirely based on how much you put in – a number you need to get right from the start.

Proposed Solutions:

1. Annuities. An annuity is a great product that guarantees income as a living benefit or a death benefit to the beneficiary.

2. Pension Fund. A superannuation, provides retirement income.

3. Social Security. The National Social Security Fund, commonly known as the NSSF. It is a government-run fund that provides retirement benefits for both everyone.

4. A diversified portfolio that you can withdraw 4% amount annually. Sometimes you can do everything right. Have a plan, invest early but market volatility threatens to wipe out your investment. A diversified portfolio is the best way to protect your investment against market volatility. So invest well.

Learn More: How to Produce Income From Investing Forever

Tame the Risk

Risk management as applied in financial planning can utilize insurance and investment products. Whatever products you select to mitigate your personal financial risk, evaluate their cost and determine their suitability to your own financial situation. Be thorough when making your considerations and remain honest with yourself.

If you read this and realize you don’t have an actionable plan custom-fitted to your goals, interests, resources and abilities, then consider working with us. We can help you develop an appropriate financial plan that works for you.

Happy Planning!

Image Credits: Top by Suzy Hazelwood from Pexels

Disclaimer: This information is provided to you as a resource for informational purposes only.

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How to Build a Passive Income Strategy

By
Irene Makanga
-
0
Wealth Architects - How to Build a Passive Income Strategy

As you actively earn your income, you’ll want to put your money to work by building a residual passive income. Passive income is not entirely dependent on you to actively earn and can be created in two main ways:

  • As an owner, where you employ technology or others to work for you.
  • As an investor, where you employ your money to work for you.

With these strategies, the aim is to achieve total time freedom, where you don’t have to trade time for money.

Passive Income Strategies

To earn passive income, you’ll need to put in capital and time. Capital and time input will however vary by the type of method you employ to earn passive income. One form of passive income will require upfront capital investment, while another may require a lot of time to materialize.

Let’s dive into what it takes to build a passive income strategy:

I. Owner Generated Passive Income

In this form of residual passive income generation, you are leveraging technology or people’s time, knowledge and energy to make money for you. Therefore, you will need to build and own a system that will generate passive income for you. There is no limit to the owner generated passive income. You can do what you like and earn an income. However, in this form of income generation, the system you have created should be able to run smoothly for at least three months without you for it to qualify.

Since they are so easy to set up, here are some of the common owner generated passive income models leveraging technology:

Digital Business Models

The internet has provided new opportunities for passive income:

  • Content and affiliate marketing – earn commissions or advertising-free through affiliate marketing.
  • Creating a service website – you’ll probably need the skills to do this but it’s a great way to create an automatic service that humans don’t want to do.
  • Build a mobile app – create value using a mobile app and earn passively with occasional work for updates.
  • E-commerce – buying/selling products online is a great form of passive income with a lot of potential for exponential growth.
  • Digital products – sell ebooks, courses and other digital products.
  • Self-publishing – write your own books and self publish to earn royalties for each copy sold.

II. Investor Generated Passive Income

As an investor building passive income, you can leverage the money you have to generate additional residual income. Passive income can take many different forms. You can earn interest, dividend and/or rental income.

A standard passive income portfolio can safely pay dividends of 4% per annum. Therefore, if you want to generate Ksh 400,000 in annual dividends you will need to have a portfolio of at least Ksh 10M.

Understanding how much is needed is probably the most important first step, as this figure now becomes your financial goal to achieve financial independence.

The next thing you’ll need to do is figure out how much you need to invest today, in order to have Ksh 10M in your portfolio within the time you have set.

Learn More: How to Produce Income From Investing Forever

Here are some common investor generated passive income models:

Financial Asset Ownership

  • Bonds – earn interest income over time.
  • Mutual funds
  • Passive stock ownership – collecting dividends on promising stocks owned.
  • Annuities – plans sold my insurance and investment companies that involve customers putting up capital in return for a smaller sum of money which adds up over time.
  • Certificate of Deposits (CDs) – low-risk, low effort and relatively low payback streams of passive income.
  • Peer to Peer Lending – earn interest income by lending small amounts to multiple people using P2P lending platforms.

Property Ownership

  • Storage space ownership
  • Purchasing vending machines
  • Real Estate investment – the oldest and most popular way to earn passive income over long time periods.
  • Real Estate Investment Trust (REITs) – real estate alternative to traditional ownership.

How Much Time Do You Need?

To set up passive income streams you’ll need to put in hard work and a lot of perseverance to set up some of the above-mentioned models. This won’t be by no means overnight success but months, years of sweat and hard work. At the end of it all, you’ll certainly earn revenue eventually.

Hence, it’s essential to evaluate if you are willing to put in the effort now and a little later.

Takeaways

There is no single passive income strategy that is better than the other. Therefore, you should consider your scope of competence. Generating income is about creating value. Note that there are a lot of get-rich-quick schemes out there making false promises. Avoid those at all cost before they sidetrack yours rob you of your dreams. Making money takes effort. If it was easy, everyone would be rich.

Therefore, take the time to plan how you can grow your income streams to free up more of your time in the future. Passive income is the foundation and the fastest way to achieve financial freedom.

Happy Building!

Image credits: Top by Alex Fu from Pexels

Disclaimer: This information is provided to you as a resource for informational purposes only.

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How to Prepare Your Finances for 2021

By
Irene Makanga
-
0
Wealth Architects - How to prepare your finances for 2021

We are now about six weeks to the end of the nightmare that is 2020. Equipped with the lessons we’ve learned, let’s prepare and move differently in the coming year. In order to improve your finances, you will need to improve your money management. While this cannot be achieved in a day, you can start by getting on the right track in the coming year with a good plan.

We hope that 2021 will be better than in 2020. However, we can only guess what lies ahead for us next year basing on what has transpired in 2020. If the economy does not recover well into 2021, here are a few things you can do to prepare your finances for 2021.

Make A Financial Plan

Money needs to be put to good use in order to serve its master well. The way you manage your money will greatly influence your quality of life. If anything can be learned from 2020, is that a financial plan is absolutely essential to ensure that we are prepared for emergencies or any other unpredictable events. A person who makes financial planning a priority can avoid consumptive debts and total financial destruction resulting from unexpected events such as a pandemic, critical illness and more.

All in all, financial planning is merely a guide to help make your goals, and financial dreams a reality. A financial plan will help you save more, and accelerate the processes to achieve your financial goals.

Get your Financial Plan prepared by us.

Boost Your Income

If anything can be learned and relearned from 2020, is that one stream of income is one step away from poverty.

Hence, it is worth increasing your sources of income for financial security and quicker goal realization. The best way to achieve this is to set up passive income streams or start a side hustle.

Learn More: How to Produce Income From Investing Forever

Improve Your Yields

We are all looking for ways to earn higher returns from our investments and avoid costly mistakes. There are many tried and tested ways to do this, and you can include them in your investment strategy for the upcoming year. As always, consult your financial advisor, exercise due diligence and conduct your own research before making any investment decision.

Choose equities over Bonds and bonds. As the market starts to recover from the pandemic, it will be a great time to invest inequities. Although they carry a greater risk than bonds, a well-balanced portfolio can offer a great return at low risk.

Opt for passive portfolio management as a way to reduce investment cost that will eat into gains.

Pick value over growth stocks. Value stocks are known to outperform growth companies internationally. Several value companies do offer dividends to investors, which can increase your yield.

Diversify. Add multiple asset classes that are different in nature to your portfolio with appreciate percentages that reflect your risk appetite. An efficient mix will greatly reduce your risk and improve expected return.

Rebalance. A lot of portfolios have been pushed off track during this period of the pandemic and therefore rebalancing is crucial. Rebalancing is essentially the act of readjusting a portfolio back to its original allocation. Read more below.

Learn More: How to Make 20% On Dividend Yields Every Year

Rebalance Your Portfolio

This year has been a volatile year. Many investors have had to rethink and readjust their investment strategies to push back on track their portfolio and return them to their original level of risk.

There are three broad types of asset categories: stocks, bonds, cash and other securities. Take stock of what you hold in these and match to your initial plan.

You can do this by taking a look at the most recent fund report to get a breakdown of how much of your fund is in stocks, bonds and cash. Once you’ve totalled your holdings in each asset class, calculate the percentage of each relative to your entire portfolio.

Depending on your results, you may need to reset your portfolio to match your investment strategy. This can be down in the following ways:

  • Increasing your investment in the underweighted portion of your portfolio (buy low).
  • Selling over-weighted portions and buying more of the underweighted class (sell high, buy low).
  • Selling only overweight asset class, to bring it back to balance (sell high).

Why rebalance? Rebalancing is an effective way to automatically buy low and sell high without the risk of your emotions affecting the investment decision.

Learn more: 3 Paths Of Wealth Accumulation

Get Insurance

The reality of COVID is becoming real and real every day for many of us. Some of us have lost family and friends. Having insurance – health, life and critical illness insurance – will protect you and your family from adding or having debt or any other financial losses during this period.

For married couples, consider buying life insurance, health insurance and insurance to cover serious illness. As for singles, health insurance or insurance for critical illness is highly recommended.

Even though your employer covers health for example, in most cases the money still isn’t enough especially for critical illness or you get laid off at this time.

Learn More: How Much Life Insurance Do You Actually Need?

All in All

Let’s remain optimistic about 2021.

As you prepare for the coming, here are some questions to ponder and reflect on. You can use them as guide for the coming year.

  • How is my financial condition now?
  • Have I met all my financial goals for the year?
  • Are my mid to long-term financial goals on track?
  • What parts of my finances can I improve in the coming year?

As you reflect on this year, I wish you all the best in the coming year. I pray that all your high hopes and dreams of improving your financial situation come true. Be it paying off your debts, cutting your expenses, saving and investing or generally managing your money better – I hope it all works out for you.

For whatever reasons you failed in keeping your financial goals in the past, this coming year, let it be different.

You’ve got this!

Image credits: Top by Olya Kobruseva from Pexels

Disclaimer: This information is provided to you as a resource for informational purposes only, and hence should not be treated as financial advice.

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How to Make 20% On Dividend Yields Every Year

By
Irene Makanga
-
0
Wealth Architects - how to make 20% annual dividend yield every year

2020 has been a crazy year for investors – pulling in and pulling out of investments. Emotions have run very high at the NSE and other exchanges around the world.

During this time of Covid-19, I spent a lot of time reading, learning, thinking, playing and building future scenarios. After watching the stock market dip and the world come to halt, I had to seriously rethink a lot of the things I once held true.

During my downtime, I built an excel scenario mimicking a Warren Buffet’s investment strategy. The famous American investor, Warren Buffett makes 35% on annual dividend yields through his investment vehicle Berkshire Hathaway.

Learn More: How to Apply Warren Buffett’s Famous Investing Advice

Here, I will share my findings and you too can achieve similar results investing in Kenyan stocks, bonds and other cash assets using his investment model.

As always, the information presented here is for informational purposes only and hence, should not be treated as financial advice. Consult with your financial advisor before making any investment decisions. Always exercise due diligence and conduct your own research.

Creating 20% Annual Dividend Yields

There are three sets of conditions you need to meet to ensure that this invesment strategy works:

  • Maintain total control over your capital.
  • Acknowledge emotions but don’t let them control you.
  • Focus on cash yields. Cash yield is the flow of cash from investments.

Control On Capital

In order for this strategy to be successful, you need to have control over your capital. This means that you need to invest your own capital and limit the use of fund managers as much as possible. This is because fund managers return on investment is price based. Thus they tend to make investments looking at the increase in prices for returns rather than invest for cash flow.

Therefore, since our goal is to invest for cash flow, using a fund manager whose goal doesn’t align with ours will only derail our investment goals.

Avoid Emotional Investing

To achieve outstanding returns as high as 30% on the investment, we need to go long-term. Emotional investing is the enemy of long-term investing. Therefore, let’s not let emotional reactions to market swings mess with our investment strategy. If you believe you have made the right decision, then when the market bounces back your decisions will yield good returns.

Learn More: 3 Ways the Emotional Elephant is a Danger to Your Finances

Focus on Cash Yields

Making at least 20% on annual dividend yields requires us to take advantage of the power of compounding. That has always been Warren Buffets secret. He reinvests his dividend yields into other long-term cashflow yields that compound billions at 20% per year or higher.

For the rest of us non-billionaires without gigantic cash flow yields, we can mimic this investment strategy. The most powerful trick I know to be successful in life is to model success.

Before we take a taste of it, let’s take a vitual walk in it’s shoes.

Making 20% On Annual Dividend Yields

Scenerio assumptions:

  • Since our initial move is to invest for annual dividends, we choose stocks with dividend yields of at least 4% and at most 10% (learn why). Therefore, let’s take a conservative stance and pick stocks that provide a 4% dividend yield for our scenario here.
  • We are investing for the long-term and therefore need to factor in the growing earnings. Let’s assume that the growth in company earnings is 10% per year.
  • Let’s invest 10,000 (for simpler math) to create a stock portfolio of stocks that provide a 4% dividend yield with growing earnings at 10% per year. Therefore, the cash yield will also grow at a 10% rate per year.
  • We shall not factor in the growth in the portfolio value over time and also ignore costs associated with investing the funds.
PeriodDividend
Yield		ReturnFuture Value
at 12%, 10 yrs		Cash Yield
Per Year
Year 04%–––
Year 14.4%4401,287.3617.27%
Year 24.84%4841,256.8617.41%
Year 35.32%5321,226.1617.58%
Year 45.86%5861,198.7517.85%
Year 56.44%6441,169.2618.13%
Year 67.09%7091,142.5318.51%
Year 77.79%7791,114.1718.93%
Year 88.57%8571,087.9119.45%
Year 99.43%9431,062.4720.05%
Year 1010.37%1,0371,037.0020.74%
Total7,41111,582.4618,993.46
Original Capital10,0007,41117,411
Cash on Cash Return74.11%156.29%109.08%

To increase our cash yields even further, we reinvest our cashflows into at the best rate of 12% per annum. We shall get 11,582.46 cash return. This yields a total return of 156.29% at the end of the 10 year period even higher than 20% return on investment.

Take Note

A few things to note. These things will significantly bring down our total return.

  • We have not factored in the cost of investing – commission fees, management fees, taxes etc. The aim is to reduce our basis using dividends and increase the cash on cash yield of our investment to recover our capital.
  • Companies may choose not to pay dividends in a given year – take note of their dividend policy before investing.
  • Other unforeseen factors may affect these results. 10 years is a long time – but that is why it is fun!

All in all, If we do not sell our shares and continue to reinvest, these returns after 10 years will have grown our cash yield on our remaining investment capital to a return of over 20% per year and continue growing for as long as we continue to invest and reinvest.

Gain Insight: Kenya’s Highest Dividend Paying Stocks of 2020

Summary

The goal of this investment strategy is to achieve yields of over 20% cash yield per year. Therefore, to achieve this, we buy great high yield companies on sale, earn dividends and reinvest the return on capital in other similar investments at the same high yield every year.

Eventually, our entire portfolio will have yields of 20% – 35% per year and every year that yield will continue to grow far in excess of inflation. Then and only then, can you consider to sit back and watch all your hard work and patience pay off.

Now go play!

Image credits: Top by Andrea Piacquadio from Pexels

Disclaimer: This information is provided to you as a resource for informational purposes only.

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The Complete Guide to The ABSA New Gold ETF

By
Irene Makanga
-
0

Have you ever wanted to invest in gold? The ABSA NewGold ETF provides a chance to buy securitized gold in a gold-backed exchange-traded fund. In 2017, the ABSA New Gold ETF was listed on the Nairobi Stock Exchange (NSE) enabling investors to invest in an instrument that tracks the price of Gold Bullion debenture in real-time.

This is a complete guide to investing in ETFs, particularly in investing the ABSA New Gold ETF or now commonly referred to as ABSA NewGold ETF a product of NewGold Issuer (RP) Ltd, as such listed as NewGold Issuer (RP) Ltd on the Nairobi Stock Exchange (NSE).

What is an ETF?

An Exchange Traded Fund (ETF) is a type of security that involves a basket of securities that are traded on an exchange just like a shares/stock. ETFs contain all types of investments including stocks, bonds, commodities or a mixture, and can cut across industry sectors or use various investment methodologies. Therefore, they act in a similar manner to mutual funds or unit trust portfolios, with the only difference being that they are traded on an exchange and their shares are bought and sold as ordinary stock. The price of an ETF’s share will change throughout a trading day as shares are bought and sold on the market.

Types of ETFs

There are various types of ETFs on larger exchanges around the world but we shall only mention four(4), which include:

  • Bond ETFs include corporate or government-issued bonds.
  • Industry ETFs track industry-specific stocks i.e. technology, oil and gas and more.
  • Currency ETFs invest in foreign currencies such as USD, GBP, JPY and more.
  • Commodity ETFs invest in commodities such as crude oil or gold – such is the case for the ABSA NewGold ETF, whose underlying asset being tracked is gold.

Is it a good investment?

ETFs are typically used for income generation, price increase speculation and to hedge or offset risk in an investor’s portfolio. This year, many investing in gold and silver ETFs particularly, are investing to offset the risk faced by the global pandemic and civil unrest experienced around the world. 

ETFs also offer a lower average cost of investment as it would normally be expensive for an investor to buy the underlying assets held in an ETF’s portfolio. Additionally, they offer a low expense ratio (the cost to operate and manage the fund) as they are passively managed. It is less time-intensive for the managers since  ETFs track an index. However, please note that there are actively-managed ETFs that have higher fees. All in all, as an investor you get to pay less broker commission as you only need to execute one transaction and have access to a vast portfolio of securities you otherwise would not. 

Are ETFs safer than stocks?

Sometimes ETFs can be quite risky especially if they invest in a single industry limiting diversification. In the times we live in, it’s not unusual for an entire industry to be severely affected and even shut down.

Also, consider the liquidity of the ETF. A lack of liquidity hinders transactions, therefore increasing the ETF’s inherent risk.

Overall, when it comes to safety in comparison to stocks, they are somewhat safer as they are more diversified than a single stock.

Investing in the ABSA NewGold ETF

The ABSA NewGold ETF trades the same way as normal equity security and therefore is subject to tax. The price of this security is based on the Kenyan shilling equivalent of the prevailing international market price of gold (typically quoted in USD). Since each NewGold security tracks the price of gold, it is backed by physical gold and there its value is equivalent to approximately 1/100th of an ounce of gold. This gold is held in a secure depository (NewGold’s custodian, ICBC Standard Bank in London) on behalf of the investors. The gold is insured, allocated and cannot be lent out.

Performance

The ABSA NewGold ETF portfolio asset allocation is 100% gold. As such, the price movement of the ETF is determined by the price movement of gold. Since gold has traditionally been used to hedge or point of safety during tough times as a store of value, gold has been rising in demand. As such, the ABSA NewGold ETF has been rising with the rise in global demand for safety.

The performance of NewGold ETF as per their last disclosure was as follows:

  • Yield-to-date. The NewGold ETF’s yield to date (YTD) as of June 2020 is 44.52%. 
  • Risk Statistics. The annualized risk of ABSA NewGold ETF is 20.34%. Since its inception, the ETF has experienced a drawdown of -28.58% as of June 2020. On the best month, the ETF experienced an upswing of 22.61%. Note: A drawdown is a measure of the deterioration of the portfolio from its historical peak. 
  • Annual Return. The best annual return of the NewGold ETF as of June 2020 is 68.89%, while as the worst annual return is -17.82%. 

Investor Benefits of ABSA NewGold ETF

  • Direct Investment in Gold. The NewGold ETF provides direct exposure to actual gold investment.
  • Lower Cost. ETFs in general have lower fee structures. The ABSA NewGold ETF charges an annual management fee of 0.30%
  • Investor protection. ETFs are fully backed by the underlying asset held by the portfolio. This portfolio holds 22.89 tons of gold in its reserve.
  • Transparency. The NewGold ETF is cross-listed on the Nairobi Stock Exchange (NSE) and also the Johannesburg Stock Exchange (JSE). This enhances information disclosure with regard to portfolio holdings, investment methodology, constituent details and net asset value. This information can easily be accessed on a daily basis. 
  • Traded like a share. Though ETFs are Unit Trust Portfolios, they trade like ordinary shares on the stock exchange. This makes them highly accessible and easy to trade. 

How to Buy & Sell the ABSA NewGold ETF

You can purchase the ABSA NewGold ETF through a broker – online or offline. Just visit or call your preferred broker and request to purchase the ABSA NewGold ETF.

Note: Brokers typically charge a commission for each trade.

Learn More: How to Buy Stocks Online on the Nairobi Stock Exchange

In A Nutshell

Let’s recap:

  • ABSA New Gold ETF’s price is determined by the price movement of gold and is quoted in the Kenyan shilling equivalent of the prevailing international market price of gold.
  • ABSA New Gold ETF is sold like an ordinary stock on the Nairobi Stock Exchange (NSE) and can be purchased through your broker.
  • The best annual return of the ABSA New Gold ETF as of June 2020 was 68.89%.
  • Gold has been used historically for income generation, price speculation and hedging or offsetting risk in an investor portfolio.

Happy Investing!

Related: What is the Minimum Amount to Invest in Nairobi Stock Exchange?

Image credits: Top by Michael Steinberg from Pexels

Article Source:

  1. ABSA Bank. “Barclays launches first exchange-traded fund in Kenya, https://www.absabank.co.ke/article-hub/press-releases/barclays-launches-first-exchange-traded-fund/.” Accessed on 01st November 2020.
  2. ETFSA. “NewGold ETF Minimum Disclosure Document – 30 June 2020, https://www.etfsa.co.za/Factsheets/absa%20-%20newgold%20-%20jun2020.pdf.” Accessed on 07th November 2020
  3. The Kenyan Wall Street. “Absa New Gold ETF Hits New High at NSE, https://kenyanwallstreet.com/absa-new-gold-etf-hits-new-high-at-nse/.” Accessed on 07th November 2020.
  4. Soko Directory. How to Invest In The NewGold In The Face of Covid-19 Pandemic, https://sokodirectory.com/2020/08/how-to-invest-in-the-newgold-in-the-face-of-covid-19-pandemic/.” Accessed on 07th November 2020.

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How to Invest During A Pandemic

By
Irene Makanga
-
0

If you are looking to learn how to invest during a pandemic – or any crisis-like market condition – and thrive, then you are in the right place. We have all seen how the pandemic has impacted the market with no end in sight. The pandemic has presented few opportunities for financial opportunism, however, it is necessary to do whatever it takes to protect our financial future and safeguard our wealth. I want to help you understand what this even means and how to take advantage of it.

In this article, I’ll share some of my best recommendations to minimize risk while investing during the pandemic.

As always, the information presented in this article is for informational purposes only and therefore, should not be misconstrued as financial advice. Take the time to speak to your financial advisor before making any investment decisions. Also, do not invest any sum that you cannot afford to lose. Exercise due diligence (always) and research every investment beforehand.

Go Long On Cash

Consider taking a long position on cash. Having cash on hand help hedge against risk in the securities market and can reduce exposure to market corrections if they occur. In other words, you need to sell before the price falls and have cash ready to get the best price in the future when the market starts to turn around.

Prices do not always stay low forever, so its important to act quickly. There has never been a better time than this to invest in the past 10 years and invest for another 10 years. Take this time to educate yourself about how COVID-19 has impacted on various industries. Some have creased completely and struggling to recover, others are soaring. Most company stock prices have dropped even though it isn’t the company’s fault but rather because fear has gripped the market driving people out.

So don’t miss this great entry for going long on the stock market. Allocate a good portion of your investment portfolio in cash reserves and short-term debt securities such as Treasury bills and bonds. Though this strategy may be too conservative, there are a lot of merits to using this strategy to hedge against risk.

Prepare for Re-entry

Prepare to re-enter the market at the optimal. This doesn’t’ necessarily have to be post-pandemic. It could be now. The right time all depends on your instincts and the performance of the stock you are tracking.

Therefore, consider preparing a watchlist of companies ready. Narrow them down the industries within your circle of competence. Its time to select specific companies within those industries that you want to invest in. While you do this, keep in mind that you are investing for the long-term -10 years or more.

The 4M Investment Analysis

When drafting this list, consider the companies that meet the 4M’s rule of investing during times uncertainity, which are:

  1. Meaning: Understanding enough in terms of value the business offers, and be confident enough to like for the long haul.
  2. Moat: You want to select a business that has an impenetrable advantage over its competition to last for the long haul.
  3. Management: The company is managed by people who invest surplus capital in a way that generates a great return on investment. Therefore, assess management, particularly the CEO as trustworthy, responsible, and driven.
  4. Margin of Safety: Determine your minimum acceptable rate of return and ensure that the company can meet or exceed this return over the next ten year period.

If a company meets these conditions, then it’s a great business to invest and well worth being in your watchlist.

Strength Indicators

However that’s to the end of it, you’ll need to further assess those companies. Now you’ll also need to consider companies that are most likely to overcome the pandemic. Key indicators for businesses most like to overcome are high demand, price control, tangible necessities and small luxuries.

  • High Demand: Consider companies that experience high demand and likely to be positively impacted by the pandemic.
  • Price Control: Consider a business with generous market edge and can raise prices with inflation.
  • Tangible Necessities: Consider businesses offering things will always be needed and remain valuable such as power, food and more.
  • Small Luxuries: Consider a business that offers small luxuries – inexpensive benefits that people indulge in order to maintain a semblance of normalcy during this time of the pandemic.

Learn More: How to Evaluate The Quality of a Stock for Long-Term Value Investing

Alternative Investment Stategies

The world of investing is deep and there are always alternatives to conventional investing strategies. However, it always advisable to invest within the scope of your own competence. Some of the most comment strategies historically and in recent times are as commodities and cryptocurrency.

Add Commodities

Commodities, particularly gold, silver and other precious metals are considered the best safe-havens assets to invest in during times of instability and uncertainty. Why? Because doesn’t produce anything, therefore less risky compare to a blue-chip stock that can fail. Since the beginning of the global outbreak of COVID-19, the price of gold has held its value exceptionally well. In fact, in the last 12 months, the price has risen by 27.83%.

By comparison to the NSE’s 20 Share Index, has gone down by about 35.65% in the last 12 months. Historically, when the stock markets nosedives, the price of gold and silver trends to either stay the same or experience an upward price movement.

Since many of us cannot physically possess or store gold or silver billion, consider investing in the ABSA NewGold EFT that tracks the price of Gold Billion, held in a third party depository in a London Bank.

Consider Cryptocurrency

There is a long-standing debate on whether cryptocurrency and blockchain-based digital assets such as Bitcoin and Ethereum are legitimate hedges against inflation or merely speculative bets. Over the course of the pandemic, cryptocurrency has performed relatively well to many traditional assets even gold. The year to date return on bitcoin is 102.03%. Though bitcoin can be quite volatile, however, it has clearly outperformed the stock market since the outbreak of Covid-19.

Learn More: Things You Need to Know Before Investing in Bitcoin

Bottomline: Invest Wisely

At the end of the day, the aim of any investor is having an optimal portfolio that is somewhat crisis-proof. Keeping in mind that there is no single investment strategy that is risk-free, there are steps you can take to minimize your exposure to systemic, inflation and market risk. So take the time to prepare to buy when the time is right. During this crisis, it is particularly important to focus on this in order to quickly recover afterwards.

Always maintain Rule #1 of Investing – Do not lose money.

Happy Investing!

Image Credits: Top by Olya Kobruseva from Pexels

Disclaimer: This information is provided to you as a resource for informational purposes only.

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