Welcome to another week of financial learning. I believe we are all well and staying safe under these “abnormal” Covid-19 times!
Today’s epistle will focus on “unreasonable” investment returns which many so chase and get disappointed in the long run.
ALSO READ: Six Helpful Pointers for Investments
For the benefit of new followers, I will go over some of the basic things that one should consider when they choose to invest their hard-earned money in any financial instrument.
The four key indicators that we need to critically assess before any investing decision are safety, return, time horizon, and convertibility.
The first component most of us focus our minds on when we want to make an investment decision is the return on investment and rightly so.
Return on your investment simply means how much extra income you earn on any money you invest in simple terms.
In Ghana, there are varied areas that you can invest be it the Capital market such as stocks and shares, bonds, etc.
We also have Money market investments such as treasury bills, fixed deposits, commercial papers, etc.
Other areas one can also invest beyond Capital and Money markets are real-time businesses and real estate investments.
There are others not mention but the principle of investment remains the same in all situations.
We need to understand that all investments involve some degree of risk. Whichever option you choose, there has to be an understanding before you invest that you could lose some or all of your money.
The U.S Security and Exchange Commission in an article titled “Financial Navigating in the Current Economy: Ten Things to Consider Before You Make Investing Decisions” intimated that “The reward for taking on risk is the potential for a greater investment return. If you have a financial goal with a long time horizon, you are likely to make more money by carefully investing in asset categories with greater risk, like stocks or bonds, rather than restricting your investments to assets with less risk, like cash equivalents.
On the other hand, investing solely in cash investments may be appropriate for short-term financial goals. The principal concern for individuals investing in cash equivalents is inflation risk, which is the risk that inflation will outpace and erode returns over time.”
I will want to share an interesting story that encompasses the basic tenets on investment returns.
Kingsley Anyaa is the only child of his father Mr. Daniel Anyaa who is an international business tycoon dealing in the sales and marketing of oil products across the West African Sub-Region.
Mr. Anyaa has other subsidiary businesses across the country which rakes in thousands on revenue monthly.
Due to his net wealth and connections, he was able to enroll Kingsley in the elite schools in Ghana and eventually sending him to Canada and Norway to further his education at the Masters and Ph.D. levels respectively.
Kingsley centered his studies on financial engineering and Derivatives. He returned to Ghana last four years to take charge of his father’s business as the Chief Operating Officer whiles Mr. Anyaa continued to act as the Managing Director and CEO.
Per their business operations, funds are accumulated in the main bank account with Obinim Bank for four months before they transferred to their business partners in Japan and Russia for extra stock based on their effective stock reorder system in place.
This had been the mode of operation for a very long time at Obinim Bank.
When Kingsley took charge of the Operational mantle, he saw business and financial opportunity in the accumulation of these funds and thus, drew his father’s attention to the benefits of investing them in short term banking instruments which could bring in some interest no matter how small it may be before they issued the transfers.
Mr. Anyaa who was initially dragging his feet bought into his son’s knowledgeable counsel.
For the start, Kingsley invested Ghs 5million out of their total funds of Ghs 11million for 3 months at Obinim Bank. They were given an effective rate of 21%.
At the end of the cycle, they had earned Ghs 262,000 as interest.
This came as a big surprise to Mr. Anyaa who was taken off his seat by such display of financial knowledge by his son.
He gave him the go-ahead to be engaging in future deals as it brought more profit and extra revenue.
This practice, therefore, became the order of the day.
After two years, Kingsley now devised ways of enriching his pocket as he now wanted to own his private business and varieties of cars to show his class as the COO.
He approached some of his university mates and other businessmen to sell the invested amount with Obinim Bank as collateral for their short term loans.
These businessmen went in for short terms loan facilities with some banks for a period ranging between 1 to 3 months.
For the easy accessibility and approval of these facilities, the banks explore the option of the client providing cash collateral in the form of investment for the fast processing of the loan.
Kingsley saw this as a big opportunity as he knew these businesses had the potential to pay off the loans before expiration.
His business proposal was to charge a commission between 20-30% for the period he gave out his father’s investment as collateral.
So he started with this proposal with a couple of businessmen and it seemed to be working well as they paid off their loans quickly for the release of the investment even before the end date of the loan.
Kingsley operated this side business for one year until he met Asiedu Nketia, his lost friend from Senior High School who was into the wholesale importation of spare parts from Korea.
He needed a month overdraft facility to pay suppliers and was directed to Kingsley based on his track record of helping other friends and businessmen.
Nketia needed an investment collateral cover of Ghs 2million for his short term overdraft facility of Ghs1.5million.
As usual, Kingsley went through his financial statement, explain the terms, and got the necessary paperwork to be done with Banku Dade Bank (Nketia’s Bank).
One month later, Kingsley got a call from Banku Dade Bank that Nketia was yet to clear off the facility, and thus, he has one week to ensure that the overdraft facility was cleared else they would be forced to recall the investment from Obinim Bank.
This got Kingsley scared and started making calls to Nketia for answers.
It was during this call that Kingsley was told Nketia has died two weeks ago after battling with cancer for 2 years.
There was a fire on the mounting. As we say it in Ghana, it ended in tears for Kingsley!
Do not focus all your efforts on the immediate promise of returns else it will also end in tears for you.
Wealth creation is a gradual process and not an event!
TD Canada Trust, illustrating the virtues of investing early in life says that if you start investing $100 a month at age 25 and increase your contributions as you age, you’ll end up a millionaire by the time you retire.
This analogy is also true in Ghana. Start investing in even the less risky vehicles like treasury bills early with a meagre amount and you will become a millionaire at retirement provided you are consistent.
The key to investment growth is consistency and not instant high returns. Do not be deceived, the principle of wealth creation has not changed and will not change.
Think of the other components of an investment such as its security, ability to convert back to cash, and the tenure of investment.
These are as equally as important as the margins or returns.
Another important way to lessen your risks of investing is to diversify your investments.
It’s common sense: don’t put all your eggs in one basket.
By picking the right group of investments based on the aforementioned asset categories, you may be able to limit your losses and reduce the fluctuations of investment returns without sacrificing too much potential gain.
I will end this article with a popular Akan proverb which says “Obanyansofoo yebu no be, yennka no asem”. This means the wise is spoken to in proverbs, not plain language.
Patrick Baah Abankwa is a chartered banker with over 6 years’ experience in main stream banking having worked in various capacities. He is currently the Business Development and Corporate Affairs Manager at the Chartered Institute of Bankers, Ghana. He has been a qualified member of the Chartered Institute of Bankers, Ghana with a good membership standing since the year 2013. He also holds EMBA and BA from Kwame Nkrumah University of Science, Technology, and the University of Ghana respectively. Patrick is the originator of the daily epistle dubbed “Savings Tip of the Day” which has been running for over a year on WhatsApp and Facebook. Patrick has also been teaching on the Topics Savings, Investment and Financial Independence for over 2 years and a research fellow for ILAPI Ghana. He runs a financial channel on Youtube by name “Patrick TV Gh” and has appeared a couple of times on the business segment of TV3 News 360. Patrick is into youth facilitation and counselling. He can be contacted via firstname.lastname@example.org and or 0243984492.