The Sunday Mail
Dollars & Sense
Kudzai Mubaiwa
Investment is an action done to grow money. We shared in the previous article on the traditional options, and we highlighted that the intention is to make more money, at the very least preserving value and beating inflation.
The final asset class is what we can collectively refer to as alternative investments. These include private equity/ venture capital, biological assets such as acquiring livestock, micro-finance through local informal savings clubs, foreign currency investments and commodities.
Private equity transactions are those in which one purchases, alongside others, ownership in a mature company that is not listed on a stock exchange. The idea is to grow the company then sell it for higher than that it was bought for – what is termed “exiting”.
There is therefore need for some level of expertise in structuring such a transaction, valuing the company before purchase and then improving it for sale after a while. This obviously is the kind of investment that requires larger amounts of money as the investment is an equity type transaction where the buyers own shares in a company. Venture capital works a little differently in that investors put money in start-ups or small businesses that have high potential for growth.
A venture capitalist will ideally own a certain level of shareholding, hardly ever all of it, as he tends to prefer investing smaller amounts spread over different types of companies.
Anyone with money that is meaningful to a start-up or small business can thus be able to invest in exchange for shareholding and benefit from the profits the company or start-up makes.
Biological assets require no introduction; most Zimbabweans grew up in or have rural homes where they reared poultry and livestock like goats and cattle.
With the present economic situation, some have preferred to go back to this traditional method of wealth creation and preservation – from savings made one can purchase a cow and each year when it bears a calf, this is as good as interest.
Those with deeper pockets play at the deeper end by growing and eventually selling unique high value breeds of cattle and the increasingly popular Boer goats.
Like any other investments this has the downside of risk – risk that the cattle can acquire disease, wander away and get lost, be stolen or die, get involved in an incident or accident. Those that choose this option must certainly further invest in the security and well-being of their livestock (investment), these are the associated costs of this kind of investment. There is wisdom in insuring the biological stock.
Savings clubs – popularly known as “round” are another great way to invest money. In truth they should now be called investment clubs as they are now more of a collective investment in which members bring in money on agreed periods, and the sum is in turn lent to those that need to borrow at some interest.
The shareholders can then get some interest on every dollar invested. The same principle is at work in buying into commodities (of any nature really), then selling them when they go high. This could be minerals, agricultural produce, oil, bricks, all of which retain and may gain value in an inflationary environment.
What then is a tactical allocation in this environment? A mix always works well when investing. Property has maintained value over the past 15 years and very few lost in it.
However, the yields are somewhat low and so it works best for the very conservative, risk averse folks. Equities, when one has selected quality or very discounted counters, stay winning in the medium to long term.
Fixed income investments are a non-starter at the moment unless these are short term investments on large amounts of money pending settling for other things hence any interest will be better than none. Alternative investments can be a hit or a miss.
The best combination would differ from person to person but for the average one it would work well to have more than 50% of a portfolio in property, almost anywhere really, for land is a finite resource that almost always gives capital appreciation. Another 30% can be put in shares for active trading and then only 20% for alternative investments.
In conclusion, here are some general dos and dont’s of investing. Firstly, do research a lot. Information is power and information can make you money. Don’t invest in anything you do not understand for example crypto-currency and foreign currency have lots of people advertising it but few who understand it. Exercise caution, only invest when and where you are sure. Do diversity your investments.
When you are still learning, spread your money- not too thin but don’t put all of it in one place. Do check what fees are for all transactions, a lot of gains can be eaten into by fees if you are not careful. Only exit when you can make profit after paying fees. Finally, do balance out cash and non-cash investments.
You can pick long term investments but you will also need cash and near cash options to cushion you for an emergency or to liquidate for education or travel or medical requirements.
Don’t try to time the market when you are just starting out. Pick safe places to invest that will give you good return beyond the short term. Don’t be emotional, markets go up and down all the time, learn to weather the storms and don’t take huge losses unnecessarily. In the same breath don’t fall in love with investments to the point of irrationally holding on when you have made your money, realise and take profits. In conclusion, don’t wait – procrastination is indeed the thief of time, start now to build your own investment portfolio!
Kudzai M Mubaiwa is a financial wellness trainer and author of the personal finance book “Take Charge of Your Personal Finance”. She also podcasts on mari.co.zw. Contact her on [email protected] or twitter @kedukudzi.
