Most people lose their hard earned money by investing at the wrong time, in the wrong places using the wrong investment methods.
Before you invest there are a few factors you need to consider.
1. The term of your investment venture
Depending on your investment objectives, it is important to consider the kind of investment you want to undertake, and the period it takes for ‘capital appreciation’.
Investments are either long term or short term in nature.
Long term investments are those that take a few years, usually more than a year for them to generate a return, while short-term investments are investments that generate a return within a period of not more than one year.
If the purpose of your investment is to provide liquidity (consistent cash flow), short term investments are advised. However if the purpose is to create a sustainable source of income/return later on in life or at a specific stipulated time, long term investments are advisable.
Short term investments usually have higher managerial costs, require constant monitoring, are more risky and have higher liquidity than long-term investments. Short term investments also have higher returns as compared to long term investments in the same scale, magnitude and with the same resource allocation.
Examples of short term investments include treasury bills, fixed deposit accounts, certificates of deposit,money and commodity markets.
Long term investments include life insurance, pension schemes, retirement benefits schemes, stocks,real estate, cash that you intend to hold for more than a year.
2. The attractiveness of your investment/business venture/product.
This factor is very important because of two reasons:
I. To determine the extensiveness of your market (Market reach)/ consumer analysis.
This will enable you to know number of consumers who are using your product or who will be ‘willing and able’ to use your product (demand). The more attractive it is, the more the number of consumers it has/will attract. E.g when investing in a telecommunications firm, it is important to consider the need for their product to the population and the number of people they can be able to reach(market reach).
II. To determine the risk of competition/ competitor analysis.
Attractive ventures usually have very extensive real or implied markets depending on the trustworthiness/dependability of your market source.
However, these ventures also attract a lot of competition, as most people will want to tap into that lucrative venture/company/product.
When one decides to pursue a very attractive market, he/she must have a very comprehensive marketing strategy in order to create a sales advantage over his or her competitors.
Most people will however decide to pursue unexplored ventures, invest in growing businesses/companies or even introduce a new product to the market for the purpose of maximizing profit, creating economies of scale, and developing a niche before it starts to attract competition thus reducing its viability. These people are called early adopters.
Therefore if the market you are to enter is too flooded and you don’t have a unique selling proposition (USP) or a concrete marketing plan, it will be advisable to steer clear of that investment opportunity.
3. Barriers to entry
There are certain barriers that prevent individuals and firms from accessing certain markets.
These barriers include intellectual properties (trademarks, copyrights, patents), government regulations (licenses, permits, policies, restrictions, bans), Start-up costs (cost of technology, economies of scale), distribution channels, product differentiation, competitive response etc.
These barriers inhibit a lot of businesses, especially start-ups, to access certain economic niches, thus forfeiting potential profit.
Therefore it is important to understand some of these barriers to entry before you decide or settle down on a specific economic venture.
4. Expected returns/ capital appreciation
Profit maximization is a great motivator for most business enterprise owners/investors.
Therefore before one begins any business it is good to consider the aspect of profit. One needs to compare the initial and running costs of your venture, time period it takes for your capital to appreciate and the managerial expertise required to the total expected returns.
One also needs to consider the time that it takes for the business venture to break even(costs=profits).
It is also important to make sure that the returns for any business venture/investment are not less than the average rate of inflation in the country. (time value of money).
5. Alternative markets/ Market diversification
Most people have the habit of beginning a business that is fully dependent on one outlet. In the event that the market closes/ collapses or in a way cant be able to continue purchasing from you, the business’s ultimate end in closure, or even worse makes huge loses.
Therefore it is important to first of all secure a market before producing any goods or service, two; to make sure that one has an alternative market(s) in the case the market fails for one reason or the other.
This is however only allowed in the event there is no contract between you and the buyer, or when the contract does not explicitly bar you from selling to another buyer.
Market diversification is a very important method of risk management.
6. Presence of a value chain.
It is prudent especially when dealing with agricultural commodities to consider products that have a value chain.
This is important because most agricultural commodities especially, have a small shelf life, and are affected by market price fluctuations because of the the general aspects of glut and scarcity, during certain periods of the year.
It is therefore important to note, that when intending to invest in some of these products, to consider the presence of value chain.
For example, maize can be eaten whole, processed into flour, made into animal feeds etc. This means than in the case one of the value chains is flooded, the product can be converted into another form and be sold to another market segment that requires that particular product.
For non-agricultural products, it is prudent, for example, when investing in a product such as land, to invest in empty/non-developed land as it can be used to set up various business enterprises depending ‘on consumer need’. E.g schools, restaurant, rentals as compared to buying an already built restaurant/school, especially when one doesn’t know the reason for the sale or closure. It may take alot of money to convert them to your preferred enterprise, in the case that the already set up enterprise(s) are unprofitable.
7. Seasonality in production.
You do not sell an umbrella when there is no rain. This becomes a very important statement especially when timing the onset of your business.
However when dealing with commodities that are affected by influx, glut and scarcity (market fluctuations) at different periods, especially agricultural commodities, it is prudent to time the market during periods of scarcity rather than glut. This means that you sell when everybody else is not.
This calls for a very thorough market survey, to be able to establish demand before the various products flood the market or when they are needed (timing is very important).
Examples of seasonal products are , back-to-school products, fashion products, holidays, weather products (air-conditioners, umbrellas) etc.
8. Security of investment/Shelf life
If you are a first time entrepreneur/investor it is good to begin with products that have a long shelf life(especially when dealing with agricultural commodities)in order to cushion your business from losses that would arise from spoilage or damage (as alot of them are also fragile).
Products with a short shelf life require alot of aggressive marketing, but even with this, there is no assurance that you will be able to sell your products on time.
In as much as these products usually have higher returns as compared to products with longer shelf lives, they come with alot of risks.
It is therefore advisable, especially when you are beginning, to begin with products that have a longer shelf life or if not, only purchase what your market can be able to comfortably handle/buy.
Also it is important, in the case of an investment, to begin by investing in investment options that have low risks such as treasury bill and bonds, fixed deposits, life insurance (from highly rated companies), certificates of deposits etc.
if you must invest in high risk business ventures, remember to also invest in insurance.
Before beginning any business or carrying out any investment, one must consider the objectives he/she wants to achieve.
The objectives may be to improve living standards, increase income, boost retirement benefits, insurance, charity etc.
In the case one wants to begin a business, the need to solve a problem in the society should supersede the need to make profit. This ensures the sustainability of your business especially for long term investments.
For traders, the need to maximize profit in a short period of time of-course takes precedence(this is however very risky).
“An investor without investments objectives is like a traveler without a destination” Ralph Seger.
10. Capital endowment
A lot of people want to begin big business ventures or pursue big investment opportunities without considering the amount of resources (financial, intellectual, emotional and psychological) they have or are willing to part with.
It is important to note that, as you begin any project, it is wise and advisable to create a budget, and most importantly provide a leeway for contingency (unforeseen circumstances), as things don’t always go as one thinks or plans.
If you plan to invest one million Kenya shillings, for example, set aside at least 200,000 ksh as contingency(reserve requirements).
Do not begin ambitious projects without having a plan that will ensure that the project is completed during the stipulated time, does not cause any unnecessary stress and has an assured return on investments.
In the case of a start up, set aside enough money to sustain you for at least six months, especially if you don’t have any other source of income. This is because businesses don’t always pick up/escalate in a fortnight.
This however doesn’t mean that you keep a business that is continually making losses without thorough analysis of the causes of loss.
All said and done, always be careful before you begin any project or you carry out any investment. Some of the best investments you’ll ever make are the ones that you don’t. You must be willing to pay the cost. ‘Cost goes before profit’ (Dutch proverb).
Most importantly, as Benjamin Franklin one of the founding fathers of the United states of America said “investment in knowledge pays the best interest”.
Always take time to practice due diligence before you undertake any investment, read, consult an expert,commit etc.
There are many considerations that you need to take before you begin a business but these are the ones that stand out for me.