While thinking of where and how to invest your money the following key considerations have to be made:
a) What are your Money Goals and Objectives?
b) How much funds are available for Investment?
c) What is your risk profile?
d) What is the expected return of investments?
e) How long should you invest for?
f) Do you have the skills/time/experience/energy to manage the investments?
g) What is your investment strategy?
Depending on the answers to these question there are various investment options available to an individual.
POSSIBLE INVESTMENT OPTIONS
Investments fall into two broad asset classes – growth and defensive. Growth assets are designed to grow your investment.
They include investments such as shares, alternative investments and property. They tend to carry higher levels of risk, yet have the potential to deliver higher returns over longer investment time frames. Defensive assets include investments such as cash and fixed interest. They tend to carry lower risk levels and, therefore, are more likely to generate lower levels of return over the long term.
Generally, defensive assets are expected to provide returns in the form of income.
INVESTMENT/ASSET CLASS CHARACTERISTICS
This section highlights some of the characteristics of the most common investment options available to an individual. The list is in no way exhaustive but can give you a feel of what is available.
Shares are securities that represent ownership in a listed company. To invest on the Uganda Securities Exchange you need to open up an SCD account with a broker. Returns come from increases or decreases in value. Returns also come from income from the company’s profits which are paid to shareholders as dividends. Shares potentially earn the highest return over the long term. However the value is more likely to fluctuate in the short term. Shares are generally considered a high-risk investment.
These include private equity investments (e.g. in various businesses like schools, shops, agribusiness, etc.) and investments made in unlisted companies (as opposed to those that are publicly listed on stock exchanges). Such investments can be made directly (e.g. a direct equity interest in such a company) or through an investment manager. Returns come from increases or decreases in value. Returns also come from income from the company’s profits which are paid to shareholders as dividends. Alternative investments potentially earn more than property, fixed interest and cash over the long term. The asset value tends to fluctuate more than property, fixed interest and cash in the short term. They are generally considered a medium-to-high risk investment.
Property may include industrial, retail or commercial real estate. It also includes unlisted property funds (maybe available through your investment manager), as well as listed property trusts (maybe available through your investment manager). Returns come from increases or decreases in value. Returns also come from income in the form of rent. The returns from listed property are linked to movements in the value of the securities and income generated by the property management companies. Potentially earn more than fixed interest and cash over the long term, but less than shares. The value tends to fluctuate more than fixed interest and cash but not shares, over time. They are however not easily converted to cash
This asset class include money in bank deposits (savings + fixed deposits), money in short-term money market securities, and collective investment schemes (Unit trusts). Returns come from interest paid on the amount invested. Returns also come from increases or decreases in value of the underlying securities due to changing interest rates. The chance of losing money on a cash investment considered remote over a one-year period, but possible. Cash is generally a stable investment that provides steady returns. The value tends to fluctuate due to changing interest rates.
Fixed interest assets include: Treasury Bonds and Bills; and debentures (Loans to Companies). The returns come from interest paid on the loan amount. (When buying fixed-interest securities, investors are ‘loaning’ money to a corporation or government at an interest rate.) Returns also come from increases or decreases in value of the underlying securities due to changing interest rates. These assets tend to provide better returns than cash over the long term, but lower returns than property and shares. The value tends to fluctuate more than cash but less than property and shares.
I would not recommend this option to any serious person intent on building wealth. Unfortunately the majority of the population consciously or unconsciously choose this option!
BASIC ASSET ALLOCATION STRATEGIES
The basic asset allocation ratio I would recommend is 50:50 between growth and defensive assets. However depending on your risk profile this can move anywhere from 30:70 to 70:30 for the defensive and aggressive investor respectively. It is important to re-balance the portfolio on a regular basis.
***collated from various sources on the internet***