Do you understand what you are investing in?

For several years, I have observed the mistakes people make in the world of investing; I have made some myself. To my mind, the most graphic lesson in investing comes after you have weathered a market downturn. The challenging investment climate of 2008 taught many of us painful but valuable lessons; such lessons can help you through the bad times, and should be applied to your portfolio as the market recovers. It is at times like this that the true meaning of risk, asset allocation and the importance of having a diversified portfolio become real and relevant.

Greed is the quickest way to lose money yet it can be overpowering. When “investment” decisions are based on sophisticated hype with little effort from the “investor” to understand the company’s direction; the investment often has little fit with overall goals and objectives and one takes on great risk to purchase the “magic” stock that would yield extraordinary returns in the short term. Indeed share prices can sky rocket in just a few weeks but when the market turns, the prices can also fall fast and furiously.

 Every investment has an element of risk. It is important to understand the risks associated with the investments you are considering. Not all investments will be suitable for you at a particular time. Determine your investment timeframe according to your goals to ensure that the investments match your risk profile and objectives. Investment success has to do with knowledge and awareness. “Intelligent investing isn’t a get rich quick process.” It is important to understand what you are investing in and to implement a strategy that is appropriate and suitable for your goals and circumstances.

Take more than just a cursory interest in the news, current events and markets. By having even a basic understanding of what a company does, who manages it, what sets it apart from the competition, and other pertinent questions, you can gain some insight to its general direction. An investor should devote some time and energy to sift through the “noise” and use the right information to arrive at an informed investment decision. It is wise to seek professional advice to help you determine an appropriate investment strategy for you but you must take responsibility for the final decision. 

For those who do not have the time or expertise to select and monitor their stock portfolios, mutual funds are a good option as professional managers make the day-to-day trading decisions. While this approach takes some of the complexity out of investing, remember that a mutual fund is merely a conduit to the financial markets. Ask questions and spend some time going through the prospectus to understand the fund manager’s investment strategy, objectives and costs of investing in a fund to ensure that it matches your goals and risk profile.

Sadly, throughout the world, there is a real temptation for product and service providers to sell what is best for them rather than what is most appropriate for buyers; the financial services industry is no different and has been tarnished by some level of mis-selling; this is due to a lack of knowledge on the part of some advisors or in others, a total a lack of scruples and commitment to their fiduciary duty. There is so much available information; be prepared to invest some time to read and learn. It pays to be informed, so that you can better assess what is on offer.

Don’t invest blindly by imitating what you friends and relations are telling you about their investments; these might not be suitable for you. Invest intelligently, with a set goal in mind, such as funding your child’s education, planning for your retirement, buying a house, or saving for your daughter’s wedding. This will help you match the right investment product with your goal. Now more than ever, every Naira counts and you have an obligation to understand and be comfortable with the investments you select. 

Nimi Akinkugbe