INVESTING WISELY & INVESTING SMART KIMISITU SACCO - NAIROBI MEMBERS EDUCATION DAY 26 TH SEPTEMBER, 2009 BY MICHAEL OPOK (MANAGEMENT CONSULTANT) OBJECTIVES OF THE PRESENTATION To introduce participants to the understanding of savings and investments. To understand the need for or objectives for personal investments To bring out the various factors to take into account when undertaking any investment. To understand the principles of successful investments. To highlight good financial tips THE END 9/26/2009 KIMISITU SACCO - NAIROBI 2 DEFINITION OF INVESTMENT Investment is the process of converting accumulated savings into productive use. To give your financial future the best chance for stability and success - Invest understanding your options; cash, fixed interest and bonds, shares, equities or investing in property INTRODUCTION Wise investment needs a clear understanding of investment objectives Every investment outlet is a unique combination of: (1) the principal value, (2) the expected income, and (3) the ease of converting principal into cash Each investment outlet has its own degree of uncertainty. Based on your willingness to assume risks, select the outlet that best satisfy your investment needs. 9/26/2009 KIMISITU SACCO - NAIROBI 4 1
Investment Objectives A major concern of all individuals, is safety of principal plus assurance of liquidity at no loss in value. Savings in this category are usually kept for emergencies. Most individuals choose a savings account for a modest return at no significant loss of safety or liquidity. Many persons, want their invested funds to provide high and stable current income in future, either to live on or to augment other income. Some Individuals frequently seek long-run appreciation (increase in market value), either by reinvesting income each year or by acquiring ownership in a prospering business venture. Cont d Investors with long-term goals will also be concerned with preserving the purchasing power of their funds. To protect against erosion of value, investors select outlets expected to grow in monetary terms as the value of the money diminishes. (Common stocks and real estate are the most frequently used or invested in). 9/26/2009 KIMISITU SACCO - NAIROBI 5 9/26/2009 KIMISITU SACCO - NAIROBI 6 investing for growth and investing for income Do you want growth in the value of your original investment over time, or is your goal to produce predictable, spendable current income--or a little of both? Your decision should depend on your individual circumstances and needs (e.g., your need to accumulate a college fund, not to be tapped for 15 years). Direct Investments An individual may invest directly, or he may give his money to a financial institution to invest in his behalf. Direct investment outlets available to most individuals consist of stock shares, bonds, and real estate. Other direct alternatives include personal loans to acquaintances (or relatives) and investing in one's own business. 9/26/2009 KIMISITU SACCO - NAIROBI 7 9/26/2009 KIMISITU SACCO - NAIROBI 8 2
Cash investments - Cash investments: bank accounts and cash management trusts, and short term deposits. - allows access to your money when needed. - most stable investment, with virtually no risk of loss over the short term, but poor returns over the long term. - The main risk - may not keep pace with inflation and purchasing power could be eroded. - tends to maintain their value, regardless of market conditions, but offer limited potential for appreciation. Cont d Cash investment suitable for investors who are seeking a higher return than cash but who want a low risk investment. They are unlikely to produce the same level of returns as growth investments such as shares and property. 9/26/2009 KIMISITU SACCO - NAIROBI 9 9/26/2009 KIMISITU SACCO - NAIROBI 10 Shares/Equities Shares (stocks or equities) are issued by companies to allow an investor to own a part of the company including its earnings and assets and become entitled to share in its future value and profits. Share prices are driven by many factors, including market forces and company performance, so tend to fluctuate. Shares are said to be a volatile investment in the short term. Shares are generally referred to as growth assets because they are considered likely to produce an increase in capital value over the long term. They may also produce an income stream through dividends on company shares. Investing in Property Property is one asset class that most of us are familiar with. Property is a growth investment for a good long term returns, but with an accompanying increase in volatility. Investments in property can be either direct or indirect. A direct property investment is actually buying real estate; a family home, land developments, While an indirect investment is made by investing in a property securities trust. 9/26/2009 KIMISITU SACCO - NAIROBI 11 9/26/2009 KIMISITU SACCO - NAIROBI 12 3
Investment Planning Define your goals: Without clear long-term financial goals it's easy to spend your money on lifestyle purchases without thinking too much about the future Do you want growth in the value of your original investment over time, or is your goal to produce predictable, spendable current income--or a little of both? Goals must be SMART: You know you want to retire, but when? You know you your kids have to go to school, but to a private or public school? Set your investment plan Once you've decided what you want from your money, establish very clear and realistic timeframes. Exactly when do you want to buy a house? Or when do you want to retire? (investment time horizon) will determine which investments are right for you 9/26/2009 KIMISITU SACCO - NAIROBI 13 9/26/2009 KIMISITU SACCO - NAIROBI 14 Staying the course keep your plan on track. Sit down regularly and reassess your goals, time frames and asset allocations. to fine-tune your strategy and keep your risk within acceptable levels As your circumstances change so may your investment goals and timeframes. DO YOU NEED A FINANCIAL ADVISOR? Risks and returns of an investment Risk; the possibility of losing your money, or investments will produce lower returns than expected. Return; reward for making the investment. increase in the value of your initial investment principal and/or by cash payments directly There is always a direct relationship between investment risk and return. WHEN THE DEAL IS TOO GOOD THINK TWICE! 9/26/2009 KIMISITU SACCO - NAIROBI 15 9/26/2009 KIMISITU SACCO - NAIROBI 16 4
compounding on returns Compounding is what happens when you "let your money ride." Reinvest returns. Unlike the income investor, who takes his money "off the table" as the cheque arrives, the growth investor lets investment returns remain invested, thereby earning a "return on the returns. Interest earned in one period becomes part of the investment itself, earning interest in subsequent periods. THE END 9/26/2009 KIMISITU SACCO - NAIROBI 17 9/26/2009 KIMISITU SACCO - NAIROBI 18 Thank You & God bless you 9/26/2009 KIMISITU SACCO - NAIROBI 19 5