Whether you have GH₵50 or GH₵200,000 to invest, the objective is the same: to make your money grow. The means however, vary dramatically based on the amount of money being invested, the state of the market, and your own investing style.
Prudent and wise measures
Pay off high interest debt
If you have a loan with a high interest rate (over 10%) from one than one lender there's no point in investing your hard-earned cash anywhere else, by paying off those loans or consolidating them you save a lot of money. Whatever interest you earn through investing (usually less than 10%) won't make much of a difference because you'll be spending a greater amount paying interest on your debt. For example, let's say Kofi has saved Gh₵4,000 for investing, but he also has ₵4,000 loan debt at a 14% interest rate with a bank. He could invest the Gh₵4,000 and if he gets a 12% return on investment, and this is being very optimistic in a year he'll have made Gh₵480 in interest. But the bank he owes will have charged him Gh₵560 in interest. He's Gh₵80 in the hole, and he still has that Gh₵4,000 principal to pay off. Why bother? Pay off the high interest debt first so that you can actually keep any money you make by investing. Otherwise, the only investors making money are the ones who loaned it to you at a high interest rate.
Building your emergency fund
If you don't have one already, it's a good idea to focus your efforts on setting aside 3-6 months of living expenses just in case the unfortunate happens, well in Ghana this idea will be quite strange to many people. This is not money that should be invested; it should be kept readily accessible and safe from swings in the market. You can split your extra money if any every month, sending part of it to your emergency fund and part of it to your investing fund. Whatever you do, don't tie up all of your extra money in investments unless you have a financial safety net in place; anything can go wrong (a job loss, an injury, or illness etc.) and failing to prepare for that possibility is irresponsible.
Writing down your investment goals
While you're paying down high interest debt and building your emergency fund, you should think about why you're investing. How much money do you want to have, and in what period of time? Different investors have different goals, such as:
- Holding onto money so that it's just above inflation
- Having a specific amount of money for a down payment in 10 years
- Building a nest egg for retirement in 20 years
- Building a college fund for a child or grandchild in 5 years
- Leaving off the interest from the investments, say treasury bills
Choosing your investments
The bigger the chunk of money you have available for investing, the more choices you have. Most people diversify by investing in more than one place, but the way they split their investments depends on their goals and the amount of risk they're willing to accept.
Savings accounts - low minimum balance, liquid but with limitations on how often the account is accessed, low interest rate (usually much lower than inflation), predictable (High earning FastTrack savings)
Money market accounts (MMAs) - higher minimum balance than savings, liquid but with limitations on how often the account is accessed, earns about twice the interest rates of savings accounts, high-yield MMAs offer higher interest rates but higher risks.
Certificates of deposit (CDs) - similar to savings account but with higher interest rates and restrictions on early withdrawal, offered by banks, brokerage firms and independent salespeople, low-risk but reduced liquidity, may require high minimum balance for desired interest rates (FastTrack advance investing)
Bonds - A loan taken out by a government or company to be paid back with interested; considered "fixed income" securities because the same income will be generated regardless of market conditions, you'll need to know the par value (amount loaned), coupon rate (interest rate), and maturity rate (when the principal and interest must be paid back, Very good for people who have lots of money to spare)
Stocks - usually purchased through brokers; you buy pieces (shares) of a corporation which entitles you to decision-making power (usually by voting to elect a board of directors). You may also receive a fraction of the profits (dividends). Dividend reinvestment plans (DRPs) and direct stock purchase plans (DSPs) - bypass brokers (and their commissions) by buying directly from companies or their agents, offered by more than 1,000 major corporations around the world and you can do this on the internet and you can invest as little as $20-30(usually in dollars) per month and can buy fractional shares of stocks, but can also be high-risk (you cannot decide the price at which to buy when you invest via such plans).
Real estate property - ties up money (not easy to liquidate investment), capital intensive (usually leveraged through mortgage loans) but it’s worth it in the long run.
Mutual funds – You can also consider the mutual fund option which usually requires limited investment. You join a community of investors with a common interest and invest as a group. Returns are higher this way because the money involved is large.
Real Estate Investment Trusts (REITs) - similar to mutual funds, but instead of investing in stocks, they invest in real estate. New in Ghana, however you can start by joining family members to invest.
Gold and silver - these are great ways to store your money and keep up with inflation. They are not subject to tax, and they are easy to store and very liquid (can buy and sell easily). Women do this well by buying jewellery and other body adornments.
Save money to invest
If you don't already have money set aside for investing, you'll need to build up your investment fund. By now, you should know how much money you'll need to reach your goals, given the risks you've chosen to undertake or the plans you have for the future.
Whatever you choose to invest in, try to buy it when it's "on sale" or when the price is low, that is, buy when no one else is buying. For example, in real estate, you'll want to purchase property when it's a buyer's market, which is when there are a high proportion of properties for sale versus potential buyers. When people are desperate to sell, you have greater room for negotiation, especially if you can see how the investment will pay off when others don't (or perhaps they do, but can't afford to act on it at the time). Another good example is the car market in Ghana, cars in Kumasi are cheaper than in Accra, and you can take advantage of this and buy when the prices are low in Kumasi and sell them in Accra when the prices are high. Note: that is for specific cars e.g. Kia Pride.
An alternative to buying low (since you never know for sure when it is low enough) is to buy at a reasonable price and sell higher. When a stock is "cheap", such as 80% or more below its 52 week high, there is a reason. Stocks typically drop in price because there is a problem with the company, whereas other products drop in price not because there is a problem with them, but because there is a lack of overall demand for the product. When the entire market drops, however, it is possible to find certain stocks that fell simply because of an overall "sell-off” (meaning there are no more stocks to sell) to find these good deals, one must do extensive valuations and research. Try to buy at a discount price when the valuation of the company shows its stock price should cost more.
Holding on tight
With more volatile investment vehicles, you may be tempted to sell off your stocks. It's easy to get worried when you see the value of your investments plummet. If you did your research, however, you probably knew what you were getting into, and you decided early on how you were going to approach the swings in the market place. When the stocks you hold plummet in price, update your research to find out what is happening to the fundamentals. If you have confidence in the stock, hold on, or, better yet, buy more at the better price. But if you no longer have the confidence in the stock and the fundamentals have changed permanently, sell. Keep in mind, however, that when you're selling your investments out of fear, so is everyone else and your exit is someone else's opportunity to buy low.
If and when the market bounces back, sell your investments, especially the cyclical stocks. Roll the profits over into another investment with better valuations (buying low, of course) and try to do so under a tax shelter that allows you to re-invest the full amount of your profits.