Set and Forget Investments

Investing is intimidating for a majority of people and its depiction in pop culture only raises this concern among people who are not already investing (and they really should be). The verb ‘investing’ usually brings up the thought of someone calling up their stock broker to carry out transactions on their behalf in a very frantic manner or people checking the price of the stocks they hold, plummet on their cellphone – it’s very one-sided and extremely unrealistic. Part of this is the reason why people are afraid of investing. Who wouldn’t be, though? When all you see are wealthy individuals that seem to know everything about it are sweating over investing, how can us common folk cope with that? And that’s where you’re WRONG! And you are not the only one. I was wrong too and I will continue to be wrong in some areas for a long time but it’s not really all are our fault. We have been sold this idea by the media and we choose to accept their truth and say “it’s too risky” or “I will never understand it” and other statements which may seem true but are far from it.

Investing like math or learning how to drive can be taught and can definitely be made easier for people to understand. And just like the difference between doing basic arithmetic and calculating the speed of a moving object in space, investing has different levels of learning. Both come from the foundations and what you learned in primary school but to calculate the speed you need to learn more about that subject. While, I don’t think you need to learn about complicated financial instruments and understand things like derivatives and futures, everyone should have a basic understanding of investing. 

I’m going to try and tackle some of the fears people have about investing by introducing some investment vehicles that ordinary people, like myself, can use to start building wealth. I have used the term “set and forget investments” because a majority of these investments will need to be tinkered with occasionally but should be relatively easy to manage.

1. Government bonds – With the advent of technology buying government bonds has become relatively easy as seen by the uptake of the latest round of the M-Akiba bond. Here is a an easy guide from their website to help the next time it is open for the public. The returns are currently at 10% per annum and they are tax-free so you there are no hidden fees that will pop up like withholding tax (15% of the interest paid) apart from mobile money withdrawal fees. Unlike other government bonds that require a minimum of Ksh. 50,000, the M-Akiba bond has a minimum of Ksh. 3,000 so it can be an option for many. However, your money is locked in for a long period of at least 3 years and the process of pulling out your investment is not the quickest. They are still safe, reliable AND you feel like you are contributing to the growth of the country unless an M-Akiba bond corruption scandal is uncovered. Woops.

2. Fixed Deposits – These are basically short term savings accounts that every bank has and you can negotiate with your bank on the rates you want. They are very safe and more liquid than government bonds but you are subjected to withholding tax of 15% on the interest earned. However, while their rates are better than a normal savings account it does not beat inflation by much especially in Kenya where inflation rates are at least 4% per year.

3. Money Market Fund – Also known as an MMF. Another kind of savings account with a fancier name. I’ve recently read a lot of articles on the topic on the Nation website and it shows that MMFs are definitely an option for those who don’t want to make too many decisions about allocating their money and are comfortable with getting decent returns. MMFs are very liquid and you get one free withdrawal from most providers of these accounts. They are subject to tax but you can start with small amounts and contribute monthly and can further cultivate a habit for saving monthly. An interesting article on the Nation website you should check out titled “Why I’m saving and investing in a money market fund” is a great starting point.

4. Pensions – This has by far been the most interesting part of the research I have undertaken to write this post. This is an investment product where you invest an amount monthly from your income for which you are not taxed and you get your money when you retire (at age 65). The second part of the statement is what a lot of people have a problem with. Part of the reason is because we live in a generation where the term “delayed gratification” means nothing. We are part of the #YOLO lifestyle where if we want something we work out butts off and get it. We are the “live fast die hard” generation and other catchy terms that form the basis of many songs sung by rappers living the high life. Guess what? You are NOT Drake, no matter how many turtle-neck sweaters you buy and how charming you might be. Retirement is something that every one, more so young people need to think about. I don’t think giving a few paragraphs to talking about pensions as an investment vehicle would do it justice so I will not spend too much time on it today.

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Pensions work on the assumption that you will be able to save a portion of your income for which you are not taxed (up to a maximum of Ksh. 20,000 monthly) and you let compound interest take care of the rest. It should be noted that the penalties for cashing out before the retirement age of 65 are quite steep so this is THE ‘set it, contribute every month and forget about touching it till you’re 65’ type of investment. The penalties are another reason people are hesitant but there are reasons that may allow you to cash it out like disability, illness or unemployment.

By the time you are 65, you will have a healthy retirement fund that can pay for a comfortable lifestyle when you won’t be able to work. This is important because as we technology advances so do our life spans which means we will live longer than our ancestors and we should be self-sufficient by then and not depend on the government because that usually works out so well (unless you live in a Scandinavian country like Finland or Denmark, and if you plan on moving there, you’re good). To be fair, many insurance companies have great return rates from 9-13% and are legally bound to go no less than 4% so they are worth looking into or waiting for a few more days till I post my next article: Why you need to have a retirement plan.

5. Saccos – Saccos are a truly Kenyan investment product much like M-Pesa. It has many benefits but recent scandals arising from the mismanagement of funds have made me wary about including them on my list. I have spoken to a few individuals in the financial sector that swear by them. Their unique benefits include being able to borrow up to 3x your savings and being a part owner much like when buying shares in a company as well as their high rates of return. But those same individuals have told me about how hard it would be for them to pull out of of their respective Saccos.

6. Buying Shares in companies you believe in – Having money is a luxury but how and where you spend your money is a responsibility. By investing your heard-earned cash into companies that you believe are going to grow (and hopefully give you a dividend every year) is one way to be an investor in the NSE without worrying too much about the day to day share price. If you have a company that you believe in and understand how it works as well being able to buy it at a fair price, you should go ahead. I am personally a shareholder of Safaricom PLC. I use Safaricom’s products every day and our country basically runs on it. Moreover, they have CSR activities that are helping the communities they are while turning HUGE profits. What’s not to love?

 

Lastly, I’d like to give to reiterate that while the title of the post is “Set and Forget Investments”, the world of investing is rarely black and white, much like the real world. There are factors that come in to play and affect companies and the economy that cannot be discounted. The only way to truly be in control of your investing emotion is to be aware of what is going on in the market. Once you are informed about things going on you are less likely to be swept up by any “fake news” and be able to make timely decisions where situations take a turn for the worse.

 

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