The purpose of investing is to have financial independence and grow your wealth over time. However, you need to be aware of the dynamics that go into investing to avoid massive losses or risks.
As an investor, you could be evaluating different investments and wondering how best to select. You could also be in a Chama with pressure to invest in a particular venture, fearing that you could lose this “once in a lifetime” opportunity. However, the question is, how do you choose the best investment? What if red is your favourite colour that you miss out on investments’ red flags? How best can you use the knowledge to evaluate a potential money market fund?
In this article, I will help you understand what you can pay attention to when investing so that you do not lose all your investment.
Lack of disclosure
Be wary of organisations that withhold information, which limits your ability to make sound financial decisions. As an investor, fully grasp the concept behind the particular venture and the securities traded. The business must also officially and in writing declare the fees that they would charge on your investments and the tax obligations. Most importantly, information on the licensing of the business, trade specifications, and location should be available to the public. Ask yourself, if anything was to happen to my money, does the business have a physical office or a functional website where I can follow up? Further, on the money market, assess whether the firm has a good and trustworthy custodian, financial auditor and trustees. Get all the information before getting off the blocks with your wealth-building ambition.
Poor reputation of the firm or the founders
The reputation and character of a founder or business executive is paramount to the success of the business. Potential investors are likely to shun away from a company that has had negative news in the past. Be wary of founders or businesses that have a bad reputation. Remember, if an organisation’s reputation is terrible, investors pull out of the company over time, which may consequently reduce the value of your stock, thereby causing you to lose your investment in the long run. The market can also decide to stop using the company’s products or services, leading to losses and eventually becoming insolvent. If the firm also has a reputation for licensing gaps and insufficient skills and experience, you could use this to judge the investments well. When assessing a new business, remember to check if the founders left their former workplace due to misappropriation of funds, poor work ethics, or bad investments, and avoid such firms altogether.
Historical data and capital preservation
Track the performance of an investment over time to understand how best returns match those of the market. Try to access the company’s resources, including the audited financial statements, to see how they have been performing over time. Further, caution is required of companies that promise returns that are way above the market rate or way below the market. Tracking the performance will help you get a sense of where the company is going and further help you be the best judge of potential returns. Although you desire to make money, this should not come at the risk of losing all your money. Be keen on assessing if the company or the money market is assuring you of capital preservation on the investments and will give fair, consistent returns.
Value misalignment
Before investing, understand and properly assess whether the organisation’s values align with your personal values. Your experience, faith, social status or personality could inform your values. For example, if you are keen on investments that fully comply with environmental, social, and governance (ESG) principles, avoid companies that do not pay attention to that. Ensure that you are at peace with the value proposition of the company and the executives, the strategy and the historical practices of the firm.
Get rich quick schemes and pressure to invest
The Good Book in Proverbs 19:2 says, “Desire without knowledge is not good, and whoever makes haste with his feet misses his way. So why are you pressured to get into that Ponzi scheme? Somebody promised you a 300% return on your investments within 6 months, but why would you want to take such a gamble? If a business is that good, why do we rush to invest without making a sober decision after doing thorough background research? In Economics, we say that there’s no such thing as a free lunch, so ask yourself, at what cost will this “good” investment come? If a money market or a savings fund is giving you 18% when the prevailing market rate is 10%, interrogate the underlying financial securities before making your investments.
Investing is a noble idea; it can even get better when you do proper background checks. Avoid the pitfalls associated with businesses and take your time before investing. Always seek professional and sound financial advice before making any investments decision.
First Published on Business Daily.
Article by Joan Kibata
