Why you should monitor your investments
Over the last 12 months we have contributed a number of articles towards understanding investment and how to make investment and what we need to understand with regards to investment. This is the last column in the series that has been running for quite a long time.A NUMBER of us look at investment as an activity that must make the difference between wealth and poverty within a short period of time.
Whenever one invests they would like to have positive returns within the shortest period of time notwithstanding that circumstances in which the investment was carried out could have changed significantly.
The primary objective of any investment is to ensure that the sum invested will increase over time and also manage the possible risk factors that might directly influence the expected outcome of the investment. Investment objectives will always be tied down to what levels of income-generation an investor will want within the timeframe of the investment.
A number of people look at investment as a parking lot, in that they hardly ever monitor their investments. When one makes an investment it is necessary to monitor its performance.
The monitoring of an investment performance is based on whether it is making an income or growing in value over time.
Investments are made to generate an income on one hand and also increase in value on the other.
The process of monitoring the income flows from an investment is through the levels of income that are paid out during the life of the investment and whether that level of income meets your income objectives on that investment.
We need to generate an income from investment for it to also make monetary sense. This can be compared to one buying shares in a company that pays out 100 percent of its earnings to shareholders, such a firm would be a good investment for income flow.
However, some companies never pay out any dividends and as such the value of the investment increases over time. This aspect is associated with a growth strategy for investment, what an investor does is look at the growth opportunity if such an investment is carried out.
Technically speaking, investors would be looking for what is termed as capital gain, an increase in the value of the investment beyond the price at which the investment was made.
When one has decided on whether they will make an investment that will generate an income or that will be looking for growth, there is need to determine how best to structure the process of monitoring the performance of the investment. This is attributed to the objectives that one has set up.
In the case of an income-based investment, one needs to ensure that the investment provides a return, which can also be regarded as a profit that will consistently be earned.
However, since the risk levels of an investment can significantly affect the earning ability in the event of declining returns, an investor will need to review the holding of such an investment.
It is important to realise that declining returns at a point in time do not necessarily mean that an investment has gone bad. One needs to evaluate the reasons and also seek any form of professional advice if they are not able to understand what is happening to their investment.
An investor must look at what has been paid for the investment and what has been earned over time.
If one invested say K65 in 1995 and has received an income over this period of around K120,000 and also the value of the investment is around K6,500, they can look back and say in terms of income, they have earned a relatively substantial amount based on nominal value, but over and above, the value of the investment has also grown in excess of 1000 percent.
But what is key is to look at the period; in this case, a 15-year period would have elapsed.
For any investment to remain on course, one has to keep monitoring the expected outcomes and also ensure that it remains in line with objectives of the investor.
Making the investment decision is sometimes very difficult but if an investor evaluates the risk factors compared with the expected returns on a given investment, then they are in a better position to undertake the investment.
We can always compare the process of investment to the story of the faithful servants in Mathew 25:14 to 30. Whereas of the three, two made a return on the amount given to them; one of them made more than the other with the same level of investment, the third, however, did not make any as he managed to save instead of investing.
This is a story that anyone who is looking into investment must relate with in that any level of investment can result in varying level of returns.
Investment is easy if the investor understands what they are doing and also develop a rationale for managing the investment in line with the objectives they have set up.
Key to managing any investment is first of all, monitor and if the results are outside the overall objectives, then change the strategy with regards to that investment.
The story in Mathew 24:14 to 30 shows that just parking the investment like the third servant can work against one as an investor.
This story is for illustrative purposes so that people can easily relate to the process of how best to manage their investments and also monitor performance to achieve the intended objective of either income or growth.
DISCLAIMER:
This article has been written by Nathan DeAssis and Kennedy Musonda on behalf of the Securities and Exchange Commission. The views expressed herein are the authors’ and do not in any way represent the views of the Commission.
For comments and questions, please email: mukachiwaya@sec.org.zm or mkapende@daily-mail.co.zm.
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