Think of investing like a staircase made of ten steps that take you from one floor to the next one in a storied building. You get to the top by taking one step at a time. It’s dangerous to skip steps. The higher you go the harder it becomes. The risk of falling increases as you go up so does the reward. You can’t move from one level to the other without taking the staircase. You may use a lift if you have one, but most of us have to take the long harder route of climbing the stairs. You can also choose to stay on the ground floor, but don’t be jealous of the people who have taken the stairs. Different people will climb the staircase in different styles and at different speeds. No worries here. Just focus on climbing your staircase.
Step zero (0). Cash in hand. This is the starting point when you earn and save cash from providing a valuable service or selling a product to another human being. You can also get cash ethically in other ways like inheritance, gifts, lotteries, etc. If this cash remains in your hands it will steadily lose value because of inflation. This cash needs to be put somewhere where it can start multiplying. Step zero is the ground floor just before you start climbing the staircase.
Step 1. Simple savings account. This is the first step in the investing world. A simple savings account will not earn you much but it’s your entry point into the investment world. Technology has enabled millions to have access to financial markets through mobile money. A mobile money account is akin to a bank savings account. Saving money in a bank or mobile money enables that cash to stay in circulation where it can be borrowed and used to finance production and consumption which generally improves the quality of life for everyone. Hiding money under a mattress is a selfish act that helps no one.
Step 2. Fixed deposit. The next step is to fix the money for a short period of time in some kind of fixed deposit. In return, the bank can lend this cash for longer periods and compensate you in the form of interest. As you climb the investment ladder you increase the chances of falling but you also get rewarded in the form of higher returns.
Step 3. Unit trusts + insurance products. Once you become comfortable putting away money for some time you can then advance to unit trusts and other insurance investment products. A unit trust is a collective investment scheme where people pool money and give it to a professional manager who invests it on their behalf. Unit trusts are regulated by the Capital Markets Authority in Uganda. You can also try a wide variety of insurance investment products available on the market.
Step 4. Treasury bills. At this stage, you are becoming more comfortable with this investing game and want to step it up a bit. You start experimenting with treasury bills where you lend money to the government for short periods of time which is typically less than a year. The government in turn pays you some interest.
Step 5. Treasury bonds. After getting a feel of treasury bills you delve into treasury bonds and start lending for longer periods of time up to 20 years. You notice that the interest is higher when you lend for longer periods. But the risk of falling at this stage also increases because of inflation and variable interest rates which makes the value of your bonds fluctuate.
Step 6. Domestic shares. You have played safe so far and wish to aspire to greater heights. You wet your beak in domestic shares on the Uganda Securities exchange. The capital requirements are so low that you buy a number of shares in different companies. You quickly realize that investing in shares is much harder than you thought. There are no guarantees and the price can go up and down wildly. Also, the dividends may be suspended and may not be paid altogether.
Step 7. International stocks. Your risk appetite has gone up and you try your hand at global stocks. You use your broker to invest on the Nairobi Securities Exchange and other regional markets. You expand your horizon to international stocks using Chipper Cash and other platforms. You are now near the top of the ladder and the risk of falling hard has increased greatly. You better be careful here and acquire the right investment advisor to help you make good decisions.
Step 8. Land & rentals. By this point, you have accumulated some capital and the world of real estate opens up to you. You acquire some plots of land. You also build a house or two plus some rentals. This step is very capital intensive and you may need to borrow some cash from the bank. This leverage increases the risk of falling even harder. Nonetheless, real estate remains a reliable container of wealth for generations to come.
Step 9. Private Equity. Enough of giving away your cash for others to manage. Now, you want to get some action by starting your own business or investing your cash in a private unlisted business. This step near the top is very enticing but it is also where most falls have been recorded. Entrepreneurship is not everyone’s cup of tea and you should carefully evaluate if it is right for you. However, it is a necessary step toward extreme wealth.
Step 10. Other fancy assets like crypto and forex. The last step is for the daredevils who are seeking huge returns with extreme risk. This last step is very slippery and you can lose everything you have worked so hard for. So be very careful here. If you are risk averse you should consider skipping the last two steps. If you do decide to take this step go in with your eyes open!
Finally, you get to the top. Life is good. It is tempting to climb another staircase. But be careful. You don’t have to climb all the stairs available. You can relax and chill on the first floor. Some people may go on to the tenth floor which is OK. Determine which level you are comfortable with and chill there.