Investing can be a great way to grow your money, but it can be daunting to know where to start. If you are planning to start investing, the best place to start is by educating yourself on the different types of investments available. Once you have a basic understanding of the different investment options, you can start to narrow down which ones may be a good fit for you.
There are many different factors to consider when making investment decisions. These include your investment goals, risk tolerance, and time horizon. You need to do research and consult a financial or a robo advisor to make sure you are making the best choices for your individual situation.
In this article, we’ll provide an overview of some of the best investment options for beginners and some tips on how to get started.
How Beginners Can Pick the Right Investment
Before you start investing, you need to understand the basics. To get started we look at important concepts every investor must understand before they begin investing.
This Pareto principle is important to understand when you are starting any important task, like when choosing investments for beginners. The pareto principle states that 80% of the results come from 20% of the effort. Using this rule, we focus on the core ideas and measurements that represent sound investment strategies and practices.
Know your investment timeline.
When it comes to investing, you need to commit to a period when you leave your investment untouched. To get a reasonable rate of return, you need a long-term horizon. Investments with a long-term horizon will weather the ups and downs of the market.
Learn the magic of compounding.
When you leave your investment untouched for years, you get to see the magic of compounding. When you earn money from your investment and use that money to earn more, you are experiencing compound growth.
Start investing early, and you will reap the benefits of compounding growth.
Choose the right assets.
It’s important to choose the right asset classes and diversify your investments. Put your money into different asset classes that are not highly correlated. For example, consider putting half your money into banking industry stocks and the rest in bonds. You can extend that to REITS, international stocks, commodities, and forex.
To choose the right asset class, you need to know your risk tolerance. If you are going to get a heart attack over losses, then you are risk averse and should consider lower-risk investments such as bonds.
Make sure you diversify your investments to avoid losses. Even the most knowledgeable investor should diversify.
Choose between traditional and alternative investments.
Investments are broadly divided into traditional assets and alternative assets.
Traditional assets include stocks, bonds, and cash. Cash includes certificates of deposits and savings accounts.
Alternative assets include real estate commodities, foreign currency, art, collectibles, derivatives, venture capital, certain insurance products, and private equity.
Investments such as bonds, stocks, and cash are ideal for those starting to invest. The rest of the investment may require highly specialized knowledge.
How much money should you invest in stocks and bonds?
As a beginner, stocks and bonds are an ideal option. To reach your investment goal, it’s important to ask yourself how much money you should invest in each. Start by looking at the historical performance of each.
It’s important to note that if you need a higher return, you will need to be able to tolerate a higher risk. Stocks have a higher return than any other asset class. The average return from the stock market in Kenya is 18.41%, while that of bonds is an average of 14%.
Based on this information, if you can take on the risk, then consider stocks. Safe investors should consider investing their money in bonds.
Don’t hoard cash.
Hoarding cash is not an option due to inflation, which erodes the value of your money. At the end of 2023, the money you had at the beginning of the year will have lost an average of 8%. The average inflation rate for 2023 is expected to be 8% in Kenya.
How to Pick Stocks
Now that we have agreed that stocks offer better returns, here is how you can choose where to put your money.
Dividends are a good way to boost your earnings. The frequency and amount of dividends depend on the company’s financial performance and its discretion. More established companies pay a higher dividend.
This is where the magic of compounding comes into play. Reinvesting any dividends you earn is a big driver in helping you create wealth.
The P/E ratio is the company’s current share price compared to its earnings per share. For example, if a company has a P/E ratio of 15, it means shareholders are willing to pay 15 for every $1 of the earnings the business makes in one year.
A higher P/E ratio means investors have higher expectations. A lower P/E ratio may mean the company is undervalued or investors expect hardships in the future. For example, the weighted average P/E ratio for the listed banks stood at 3.0x in 2022, with banks such as Stanbic Bank and Standard Chartered closing the year at P/E ratios of 5.0x and 5.4x, respectively.
Establish the industry average and choose companies with a higher p/E ratio.
Beta indicates the volatility of a stock in comparison to the market as a whole. A beta of 1 means the stock is exhibiting volatility identical to the market, while a beta of less than 1 means the stock is less volatile. A beta of more than 1 is more volatile.
For example, if a stock has a beta of 1.3%, it is 30% more volatile than the market. In the event of any rise in stock prices, the price is expected to rise by at least 8%. Use beta to mitigate market swings and losses.
Earnings per share (EPS)
EPS is the company’s net profit divided by the number of common shares that are outstanding. You can use EPS to see how much you will earn as a shareholder. A higher EPS translates into a higher share price. For example, the earnings per share for Safaricom in the year ending March 2023 were 1.55 as compared to 1.74 in 2022.
Don’t get excited about a stock after reading the headlines. Go back to its history and see how it has performed over the years. Check the stock’s performance over a period of, say, 52 weeks to get a sense of where the stock is headed.
Technical and fundamental analysis
You can pick stocks using technical and fundamental analysis. As a beginner, you may need the help of a financial advisor to do this. Let’s look at what each encompasses.
Technical analysis involves reviewing large chunks of data to be able to forecast the direction a stock will take. The data in this case is past performance and trading volumes. Technical analysts believe stock prices follow a pattern, and they capitalize on it to make well-timed trades.
Fundamental analysis considers the intrinsic value of a stock. It involves looking at the prospects of the industry, the quality of the company’s management, revenues, and profit margins. Fundamental analysis is easier and makes much more sense to beginner investors.
Make sure to consider the cost of investing. Brokerage fees and expense ratios will pull money from your portfolio. Fees will make you miss the effects of compounding, and it’s therefore important to manage the investment costs.
Factors Beginners Should Consider When Investing.
Never invested before. Here is what you should consider:
Goals and time horizon
Before you start investing, write down what you want to achieve and the length of time you will invest before you reach your goals. If the time horizon to reach your goal is short, then you may have to consider other options for making money.
Risk tolerance and diversification
Every investment has a level of risk. You need to understand your personal risk tolerance. Gauge how comfortable you are with the level of risk for each investment.
Avoid putting all your eggs in one basket. Spread your money across various investments.
Return on investment (ROI)
This is the benefit you get after investing. It’s either a dividend, interest, or capital appreciation. Check the net profit after tax of your investment to see the actual return. A good investment should have a return that is higher than the inflation rate.
Tax and its implications
Different investments have different tax rules. Consider the tax implications to secure a higher return. A good investment should have a high after-tax income.
What If I Have Lots of Cash but No Investment Experience?
If you find yourself in the fortunate position of having a significant amount of cash but no investment experience, approach the situation carefully and strategically. Investing can be a complex and risky endeavor, and making the wrong decisions can have serious financial consequences.
One option is to seek the expertise of a financial advisor who can help guide you in making sound investment decisions. It’s essential to find a financial advisor or a robo advisor who has a strong track record of success and who aligns with your investment objectives and risk tolerance.
Another option is to educate yourself on investing through books, online resources, and courses. It’s important to gain a thorough understanding of investment principles and strategies before making any decisions. Additionally, consider starting with low-risk investments such as index funds or bonds to gain experience before moving on to riskier investments.
Whatever path you choose, approach investing for beginners with caution and a long-term perspective. Ensure you informed and make decisions based on research and sound financial principles, rather than emotion or speculation.
The Best Investment for Beginners
It’s important to explore investment opportunities that align with your investment goals, local market dynamics, economic conditions, and regulatory environment. Here are the best investment options if you are starting your investment journey.
Government bonds are one of the safest investment options available. In Kenya, the government issues Treasury Bonds and Treasury Bills, which offer fixed interest rates and regular coupon payments. These investments are backed by the full faith and credit of the Kenyan government, making them relatively low risk.
Government bonds provide a steady income stream and are suitable for those who are beginning their investment journey and conservative investors seeking stable returns.
Investing in stocks provides an opportunity to participate in the growth of well-established companies listed on the Nairobi Securities Exchange (NSE). Beginners can start by investing in blue-chip stocks, which are shares of large, reputable companies with a history of stable performance.
Stock investments carry higher risk compared to bonds, but they offer the potential for capital appreciation and dividends. It’s advisable for beginners to conduct thorough research or speak to their financial advisors before investing in stocks.
Unit trusts and mutual funds
Unit trusts and mutual funds are collective investment schemes that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets. These investment vehicles are managed by professional fund managers, making them suitable for beginners who may lack expertise in investment analysis.
Unit trusts and mutual funds provide diversification, liquidity, and the potential for higher returns compared to individual stocks or bonds. Investors can choose unit trusts or mutual funds based on their risk tolerance and investment goals.
Real estate investment trusts (REITS)
Real Estate Investment Trusts (REITs) allow individuals to invest in the real estate sector without the need for direct property ownership. REITs are companies that own, manage, or finance income-generating real estate properties such as residential, commercial, or industrial buildings.
By investing in REITs listed on the NSE, beginners can gain exposure to the real estate market and earn dividends from rental income and property value appreciation. REITs offer a convenient way to diversify one’s investment portfolio and benefit from the potential growth of the real estate sector.
Fixed deposit accounts
Fixed deposit accounts are offered by commercial banks and provide a safe and straightforward investment option for beginners. By depositing a specific amount of money with a bank for a predetermined period, investors can earn a fixed interest rate on their savings. Fixed-deposit accounts are relatively low-risk and offer guaranteed returns. They can serve as a starting point for beginners to accumulate capital before venturing into more complex investment options.
Retirement plans from your employer, or any other plans offer major incentives. Most employers often match your contributions to the plans. If your employer offers to match your contribution, don’t turn down free money. Contribute the most and enjoy the maximum benefits.
Additionally, contributions to retirement are exempt from tax. This reduces the tax burden. Workplace retirement plans allow you to consistently invest over time. Make sure you choose the best retirement and 401(k) plans.
Exchange traded funds(ETF)
Exchange traded funds, or ETFs, have become increasingly popular in recent years. ETFs offer a simple and cost-effective way for investors to gain exposure to a diverse range of stocks, bonds and other asset classes.
For those who are just beginning to invest, ETFs can be an attractive option. Unlike individual stocks, which require significant research and analysis, ETFs offer broad exposure to entire markets or sectors. This means that investors can potentially achieve diversification with minimal effort.
Furthermore, ETFs generally have lower fees than actively managed mutual funds, making them a more cost-effective option for investors looking to maximize their returns. With the rise of online brokerages, investing in ETFs has never been easier or more accessible.
However, like any investment, it is important to do your due diligence and research before investing in a specific ETF. Factors like the expense ratio, track record, and underlying assets of the ETF should all be considered. Additionally, investors should choose an ETF that aligns with their investment goals and risk tolerance.
Overall, for those beginning to invest, ETFs offer a straightforward and affordable way to gain exposure to the stock market. With careful research and a long-term investment mindset, ETFs can be an effective tool for building a diversified investment portfolio.
Index funds have become a popular investment option for those beginning their investment journey. These types of funds offer investors a low-risk, diverse investment option. Rather than individually selecting stocks, index funds track a specific market index, such as the S&P 500.
Investing in index funds offers several advantages, including lower fees, automatic diversification, and long-term growth potential. For those new to investing, index funds provide a straightforward, yet effective way to start building a portfolio.
Before investing, it’s important to research and select a reputable fund, as well as to understand the risks and potential returns. Additionally, it’s crucial to establish a long-term investment strategy and consistently contribute to your fund over time.
Overall, index funds are a smart investment choice for those starting their investment journey, looking to build a diverse portfolio and achieve long-term financial goals.
It’s important to understand the available investment options so you can make informed decisions that align with your financial goals and risk tolerance. Whether you opt for government bonds, stocks, unit trusts, REITs, or fixed deposit accounts, conduct thorough research, talk to your financial advisor or a robo advisor, and diversify investments to mitigate risks.
Investing in one’s financial future requires patience, discipline, and a long-term perspective. With careful planning and a focus on learning, beginners can navigate the investment landscape in Kenya and lay a solid foundation for building wealth over time.
Have you started your investment journey? Which investment can you confidently invest in? Let us know in the comment section on how you are investing your money.
- Retirement Planning for Self-Employed Individuals
- How to Get the Best Personal Loan Offers from Different Lenders
- What is Peer-to-Peer Lending?
- Personal Loan vs. Credit Card: Which is Better for Small Expenses?
- The Complete Guide to Merchant Cash Advance(MCA) Requirements