When I was starting my career, these are some of the ways I used my money:
• I invested in whatever came my way
• I spent my Saturdays visiting farms and construction sites
• I lost a tonne of money
In 2016, 4 years after I started investing, I was thinking about getting a master’s degree. So, I started paying more attention to my finances. I finally got around to measuring my portfolio return. To my shock and dismay, it was earning an average of 9% per annum (p.a), around 6% after taxes and fees. This was shocking because some opportunities I’d invested in promised 20 to 25% p.a. The more lucrative ones were promising two to three times my money. So, how could I earn less than a simple Money Market Fund (MMF)?? The answer? I’d lost so much money and I was taking a lot of risks, but not getting any of the rewards.
To help you be wiser in how you choose to invest your money here are the lessons I learned that can help you:
Lesson 1: Understand your goals
I'd invest in everything that seemed interesting so that I could feel like I'm doing something. I lacked focus or direction, so I wasn’t able to truly assess opportunities. Now I have a return target that will get me to my financial freedom number, as well as the milestones along the way (stuff like a house, car upgrades, and good education for my kids). The difference is that I started tracking my portfolio's performance alongside my goals.
I know that I don’t need hundreds of millions of dollars or to ‘make a lot of interest’ (thank you compound interest!!) to reach my goals. So, I can be patient and consistent with achieving my target portfolio value. This is possible because I know exactly how much I need, how much I need to be investing every year (broken into months) and my target return. Once a quarter, I review this and make adjustments as needed.
Lesson 2: Time is expensive
Investing in many things meant I was always running around, finding new opportunities and managing my portfolio. Now, I work towards passive income and consider time to manage when making an investment decision.
It was common for me to invest in something that earned 15% p.a. In interest (before taxes & fees) and required me to dedicate two hours every week to making sure it went well.
Once I did the maths, my investment philosophy changed. After paying the costs associated with investing and valuing my time, I realized I was spending two hours a week or 104 hours a year to gain an additional 1 or 2% interest. Is that really worth it? Meanwhile, I’d be ignoring opportunities like bonds which are basically hands-free and pay 12+% p.a. after tax because I thought they weren’t lucrative enough.
Lesson 3: Opportunity cost is the ultimate hidden cost
We are keen to understand any hidden transaction costs or penalties when investing. Those are important to factor in, but they don't compare to opportunity costs. When you lose 50K, you've not just lost 50K, you've lost ALL the future interest it could have earned. Similarly, the time when your money is not invested is expensive!
Now, I visualize the future value of every investment and assess it like I'm risking the potential future value. How often have you said ‘Ah, it’s just 50K!’ Grow that 50K over 20 years and decide if you still want to let it go. This applies both when you are making a risky investment with a high probability that you'll lose your money or you are choosing not to invest that amount. Losing money is extremely expensive, and that’s why managing your risk is so important.
This article is written by Africa's Pocket an organisation set to help you as an individual to be better at saving and investing so you can get closer to financial freedom.
Check out their website to learn more and sign up for their services: https://www.africaspocket.com