Majority of us today realize the importance of saving only when we are out of school and have worked long enough to secure a promotion at the workplace and save. This only comes after the car has been bought and perhaps still juggling to pay up for a mortgage. Under such circumstances, investment plans rarely yield anticipated gains as pressure is usually high and there is always an emerging need to be taken care of.
Today’s investor is different; thanks to the realization by the young that investing starts early. Whether this is done directly by the investor him/herself or by the investor’s guardian, it pays out greatly in the long term.
Such a saving can vary from the home piggy box to the young savers bank account to the investment account held at the bank. Others are managed accounts held at large financial institutions and fund management companies. Whatever the investment, it is wise to very carefully pick out the proper investment for children in order to benefit them in the long run. More importantly, it should be something that should excite them and enable them learn by doing since that enables them strengthen their investment selection strategies.
Take the example of Sally. Her mother opened an investment account for her when she was thirteen years old. At that that time, her mum would deposit Kshs. 6,000 into a nominee account with an investment bank in the Kenya. That was in 2003 when the local index was at below 1,500 (currently at 5,300). Here total contribution for the first year was Kshs. 72,000. With a regular contribution that never changed, she was able contribute only Kshs. 360,000. Part of her portfolio lost in the last quarter of 2007 and early 2008. Fortunately, her investment was already at over a million by June this year, thanks to the good returns the country enjoyed in 2004 to 2006 when her investment more than tripled.
Being a first year at the university, her priority is to take medicine but definitely not breaking her passion for the account she so much wants to invest. Her joy lies in taking risks and the most exciting of all is investing in stocks. Had the mother not invested for her the cash, which she promises to pay back within a year, then she probably wouldn’t have invested at all, because she would have got into the market when it was already too late. Luckily for Sally’s mum, she realized the time value of money.
On the contrary, Mary works as a mid level manager at a listed commercial bank. She is in her late thirties. In 2006, a Sales Executive with a fund management firm approached her and marketed for her a Fund in which she could invest Kshs. 200,000 and get excellent returns in a few years time. Mary gladly invested the only Kshs. 200,00 she had at a fixed deposit account at her bank. Unfortunately, Mary had been hired on the old education system and when the bank hired consultants to review the company performance in relation to duties held by each staff, she was retrenched.
At 41, she was not able to secure another job early this year (2008). She therefore decided to withdraw her investment with the fund management company and use part of the funds to take a diploma at a college in town. Unfortunately, she could not recover her investment because the funds were all held in an equity fund and the Kenyan market had greatly lost owing to the post election crisis.
Mary approached a colleague’s stock broking firm who promised to do the most he could with the money to add value just before the next college intake. Not much is bound to happen though but had Mary understood that her situation required a different strategy, she would have made a decision that would suit her.
If the two scenarios above were to be matched based on need, its perhaps Mary who needed Sally’s investment approach since she required short term while Sally would have benefitted from Mary’s long term approach since she was young and her cash needs did not fall due immediately.
Majority of investors today make this same mistake; invest long term when they are 64 years of age and go short term at 23. If Sally regrets one thing; it is not being able to watch over the investment even when she was 13 because at that time, its still the mum who managed it.
Everyone, be it legal practitioners, doctors, accountants, farmers or people in other walks of life want to invest. However, we fail to recognize the essence of having a plan, or the fact that the earlier this starts the better and more exciting it gets. For example; rarely do people invest for their children’s college education before they are actually out of high school. It does not motivate the children to work hard in their pursuit of rich investment portfolios.
If majority of us were asked today, we’d rather that our parents started investing for us when we were 15 and billed us at 24 when we got our first jobs. It is very important to start early for your kids to actually benefit when the time comes. And they will definitely be excited to do it for their children and that can only lead to a greater transfer of good investment decisions.
Are you making the right investment decisions today for your dependents? If not, please consult your financial adviser.
By Michael Musau
CEO Emerging Africa Capital
Licensed by The Capital Markets Authority as Investment Advisers
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