Things to Consider Before You Make Investing Decisions.

A few days ago, one of my mentees called me for some investment advice. She wanted to know if it was okay to purchase a piece of land on the outskirts of the city for investment purposes. To add a bit of context, she is a banker who resides in mainland Lagos and works on the island. My mind was already skewed towards the non-affirmative however, my first question to her was carefully crafted to draw out her financial goals – “how much do you have and what are you looking to achieve?” I also know that she has working knowledge of financial assets and other traditional investments. So, I was curious to learn why this piece of land was under consideration this time.

She responded that she was looking to grow her money and possibly, gain another income stream. Understandably, she piqued my interest right there. “Another income stream is an excellent idea for you right now, please tell me more” I said. She noted that her parents lived near the property and her Dad had made a proposition. He wanted her to purchase the land, set up a sachet water factory and start to produce same for sale. She confirmed that he had experience with such ventures and was willing to manage the business for her. Of course, the conversation took as different turn from there and we closed on a rather promising note.

Why am I sharing this? In truth, I was almost sure that piece of land was not the best option for her given the financial goals we crafted together but something significant changed my pre-conceived notion. Would you like to guess? Yes, Information!  

No rational investor wants to lose money. Investors want to protect their money, grow it and enjoy the benefits of financial security. The most important thing to seek as an investor is information - what is this investment opportunity about and why is it right for me?

Which other things should you consider? Let’s jump right in:

1.  Investment information: I shall say it again; information should be top of mind. Ask all the pertinent questions before releasing your money and if you still have grey areas/unanswered questions, ask again! If you’re not convinced that all bases have been covered, perhaps you should reconsider your options.

2.  Financial goals: What is your goal for this particular investment? Are you investing to provide for something in particular? Your goal largely informs your time horizon and risk tolerance. For example, if you’re investing to make up funds for your master’s education next year, your time horizon is one year, and that money cannot be invested in the stock market. So, what is the investment tenor, and does it match your goals? What is your comfort zone in taking on investment risk? Are you scared to lose your money or happy to take on medium – high risk? Is capital preservation key for you? Relatedly, is your existing investment portfolio diversified enough? Do you have enough fixed income investments to accommodate a different asset class currently?

3.  Counterparty considerations: Now that the strategy is clear, the following must be considered. Who are you lending your money to? Who is the issuer of the security? Can you trust them with your money? What is the perceived counterparty risk, and does it fit your risk profile as identified above? Will you get your money back? Is the company regulated by the requisite authorities for that sector e.g. Central Bank for the financial institutions and SEC for Corporates? If you’re buying equity, the decision must be backed by lots of research into the company’s fundamentals.

4.  Investment return: This speaks to the interest rate/yield being promised. Does this amount reward you adequately for the risk, time and counterparty considerations we described above? The wish of every investor is to make out money and collect it back in full, with interest. Make sure you’re comfortable with the risk/reward situation as any investment that promises misplaced extraordinary returns might be a scam.

The factors I described above are key considerations for majority of investment opportunities, whether it’s for Fixed deposit accounts, Treasury bills and bonds, Mutual funds, Real Estate, Gold, Agribusiness or SME funding.

You must ask all these questions and I believe the ultimate question remains - will you get your money back?