1 Short term deposits Bank savings accounts: The simplest kind of short term (or cash) investment is a savings account. Returns are low compared to other investments, but returns are guaranteed by the supplier - so your investment won't drop in value in the short term like others might. You can withdraw part or all of your money whenever you want (total liquidity). This makes them ideal for short term savings goals, or as a place to keep your emergency fund. They're not a good investment option for medium or long term goals. Fixed Deposit term investment Bank fixed term investment you give the bank a lump sum for a set period (a fixed term) usually three, six or 12 months. Your money is locked away for the fixed term. In return, you get a higher interest rate than you could get in a straight savings account. You may be able to withdraw your money, but you will get a lower rate. These can be a good short or medium term investment, depending on interest rates. Interest rates are always changing - sometimes they go through a "high phase" - this is usually a good time to have money on fixed term deposit. 2 Bonds A bond is like an IOU issued by a government or a company. You give them money for a certain period, and they promise to pay it back at a certain interest rate. Bonds lock your money away for a set period of time, but they can sometimes be traded. Generally, they aren't a good short term investment. Small investors do not usually invest directly in bonds, it is more usual to go through a managed fund. 3 Property Your home For most, their largest investment is their home. It's a special kind of investment - it doubles as the place you live, and it has a strong emotional element. Be careful to separate your emotional ties to your home from your investment objectives. You should think about how much of your net worth is tied up in your home. Would it be wiser to buy a smaller house and spread your money across other investments as well? Your home is probably the biggest investment you'll make during your lifetime. When you plan for your retirement, you need to think about your retirement home as a non-financial asset. It gives you shelter and accommodation but not spending money. One of the biggest retirement planning decisions you need to make is how much of your total net worth you keep in your house, and how much you put into other investments that can produce income to supplement annuity. For example, you could aim for a Ksh200,000 home and investments of Ksh50,000, or a Ksh150,000 home and investments of Ksh100,000; but a Ksh300,000 home and Ksh150,000 investments may be out of reach. How will you decide the right investment mix of house value and investments? There are three strategies to consider: Strategy 1: A conservative, low risk approach. You view your home as providing necessary accommodation - not as an investment.
You aim for a modest home, or successive homes as family circumstances change, and don't expect any major changes in real value over the years. When you retire, you may stay in the family home or sell it and buy a retirement home with the proceeds. You view saving for retirement as a separate exercise, and you save hard for retirement. Strategy 2: Involves an investment risk Here, much of your potential retirement income depends on the state of the property market when you decide to retire. That's a risk you are taking. You view your home as accommodation and an investment. You seek to acquire or develop a home in a popular and/or growth area where you expect values to increase. You may make improvements to enhance the home's value. You sell the home on or before retirement, and expect to make a good profit. Then you buy a less expensive home. The surplus funds are an important part of your retirement fund. A problem is that few people actually want a more modest home when the time comes to sell. Strategy 3: The lifestyle approach This involves sacrificing some retirement income and possibly other optional activities such as travel or club membership to enjoy your own amenities. You work hard through your life to afford a home you love. On retirement, you see your home, location and facilities (such as a garden or pool) as an important part of your retirement lifestyle. You are prepared to sacrifice some income to enjoy a higher quality home. Your Decision In the end, the strategy you choose will be a balance of two big factors - how much you like your home, and how much income you want in retirement. Consider the options, decide your strategy, then go back to the calculators to complete your retirement planning. Rental Property Owning property rented to individuals or businesses can be a safe and profitable investment. Returns from property investment come from rental income, after deducting expenses, and from the increase in the value of property over time. People debate whether property is a better investment than shares. What’s important to remember is that they’re different forms of investment. If well managed both can provide good long-term results. If not, and without the right knowledge and attention, investment in shares and property can result in significant losses. It’s easy to see losses on the share market because the prices are available almost daily. Losses on property investment are generally not published, so don’t believe anyone who suggests “you can’t go wrong with property investment”. We don’t encourage anyone to rush into investment in shares in particular companies or investment in a particular property. Unless you’re prepared to put the time into understanding and managing the many aspects and issues of property investment, then we suggest you leave it to others. That’s not to say you can’t benefit from property as an investment. There are several different ways in investing in property - directly or indirectly. 4 Direct Property Investment In direct property investment, you can manage the day-to-day administration of your rental property yourself, or use a property management company to do it for you. A property management company takes on the tasks of finding tenants, collecting the rent and bond monies, and attending to maintenance issues etc on your behalf. The fees charged for these services are usually a percentage of the rental income. 5 Indirect Property Investment For an indirect property investment, you can invest in a superannuation scheme or managed investment fund that invests some of your money in property. This could be by way of ownership of rented buildings or by way of an investment in shares of public companies, which specialise in property ownership. This is another option that gives you the many advantages of property ownership without having to find the property and do the hands on management yourself. This type of indirect property investment also makes it easier for the average investor to get the benefits of diversification. 6 Shares By investing in shares in a public company listed on a stock exchange you get the right to share in the future income and value of that company. Your return can come in two ways: Dividends paid out of the profits made by the company.
Capital gains made because you are able at some time to sell your shares for more than you paid. Gains may reflect the fact that the company has grown or improved its performance or that the investment community see that it has improved future prospects. Capital losses can also arise.
The price of shares in any individual public listed company can vary from day to day. On any day some shares may go up in value and some down, depending on how investors view the prospects of each company. And all of the listed company shares in a particular country or industry may increase or decrease in price because of rises and falls in economic confidence or changes in the particular industry. There are a range of complex factors which influence share prices on a daily basis and no one can accurately predict what price listed shares will be in the future. We know from past experience that some companies will fail and some will flourish. Overall, the long-term trend is for the aggregate market value of listed companies to increase at a rate higher than inflation. Therefore, by investing in a wide range of companies operating in a range of industries and countries, an investor has a good chance of making long-term gains. Remember that in assessing the return from shares you need to take into account of dividends received as well as capital gains. Because of the volatility of share prices (i.e. the fact that in the short term they may go up or down) it is not wise to invest funds, which you need in the short term, in shares. When you need your money you’ll generally be able to sell your shares, but the price at the time may be below your purchase price. Shares should be used as a long-term investment. 7 Direct investment You can invest directly in term deposits, bonds, shares and property or you can place your money in a superannuation scheme or managed fund and have full time specialists look after the investment decisions for you. For some people making their own investment decisions and taking a more hands on approach gives them personal satisfaction and possibly some tax advantages. If you’re interested in direct investment talk to an accountant or financial adviser. Direct investment in shares in specific companies or selected rental properties should only be undertaken if you have detailed knowledge or are prepared to pay for specialist advice. Particularly in the case of property investment, you need to be willing to either spend the necessary time on administration and management, or to pay a property management company to do this for you. If you’re interested in direct investment in shares you can start by talking to a financial adviser or member of the Stock Exchange. People who want to acquire their own property investment generally have to rely more on their own knowledge and judgment. It’s therefore important to read publications and attend property investment seminars before making any decisions. Issues you need to consider include the location and type of property (e.g. city or rural, residential, retail, warehouse, manufacturing, office or special purpose property such as motels or car parking buildings etc), financing and taxation arrangements, price, condition of property and maintenance requirements, lease terms, selection of sound tenants, record keeping etc. Owning a property is like operating a small business. Know the business, put time into the detail and you’ve a good chance of doing well. Rushing in without doing your homework can lead to disaster or at least a risk that you’ll lose some of your capital. If you want to invest directly in shares or property, remember the importance of duration, risk, diversification, returns and liquidity. 8 Managed funds In a managed fund your money is pooled with other investors, and a professional fund manager invests it in a variety of investments. Managed funds come in many forms - different funds invest in different types of assets for different objectives. Some funds target all-out growth and invest more in high risk shares than others - they could rise dramatically or just as easily drop dramatically. These are funds for money that isn't absolutely vital to your future plans. Other funds look for solid long term growth from a range of deposits, bonds, and shares - a better place for a lump sum intended for your retirement. Financial advisers, banks and insurance companies can all advise you on managed funds that match your investment needs. Managed funds usually involve paying management and administration fees. These can vary a lot, so check to see what you'd have to pay. Use our product comparison checklist to compare several funds. And whether you're investing through a fund or directly, seek for financial advice to help you get good professional advice. i. Your investment profile Your investment profile will help you work out the type of investment you should consider. There are four factors in your investment profile: Duration - How long do you want to invest for? Returns - Do you want income or growth? Liquidity - Do you need to get to your money easily? Risk - Understanding the nature of risk involved in different forms of investment and taking account of your views on risk. 12% return, can you really afford it? There's little point investing in something offering returns of 12% or more if you end up losing some or all of your money. It might be that you have a couple of different investment goals. You might be saving for an overseas holiday, and saving for your retirement at the same time. You'd have separate investment profiles to match each goal, and the best investments for you will be different in each case. ii. Duration Duration means how long you want to invest for. Short term - 1 to 3 years Medium term - 3 to 7 years Long term - over 7 years Money you are saving to go overseas in two years time is a short term investment. So you need to make sure you'll be able to get it when you need it. Money you are putting away for your retirement can be a long term investment. Over a longer period of time you'll be more interested in capital growth. It's common to have different investments of different durations. iii. Returns - Income or growth? To work out the type of returns that will suit you, ask yourself if you're more interested in income or growth.
Do you want to use the money your investment earns as income to live off during the duration of the investment?
Do you want to reinvest it with the original lump sum, and grow your lump sum as much as possible?
If you need short term income from your investment, it's probably best to put your money where you can guarantee how much money it will earn - such as a bank deposit paying a fixed amount of interest for a set period. If, on the other hand, you don't need the income in the short term and you want to grow your lump sum as much as possible, you could consider investments that don't guarantee the return from year to year, such as shares. iv. Liquidity Liquidity means the speed you can convert your investment into money before the end of your investment period, without taking a loss. High liquidity investments mean you can get at your investment anytime, without losing any of your investment. A bank savings account is the classic example of a high liquidity investment. In a low liquidity investment, it may take time to find a buyer at a price which is acceptable to you. Property is usually a low liquidity investment. Shares in public companies generally have a reasonable liquidity. An interest in a forestry syndicate will probably have low liquidity. Some investments maybe illiquid - you can't get your money until a certain date or event (e.g. retirement). It is important you understand and are comfortable with the risk. |
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