How to avoid scams and make wise investment decisions.

This feature on how to avoid scams and make wise money decisions in Kenya was written by Economic and Financial Analyst Ephraim Njega: I don’t know where people got this impression that trading in currencies is the easiest way to get rich these days. Before you invest in any asset you need to understand about the principles which guide such activities.

1). You need to understand the nexus between risk and return – when you hear about returns always think about the corresponding risks involved. There is no investment without risk. Even government securities carry risks such as inflation. Serious investment is about taking calculated risks. When someone is selling you an investment with very high returns remember the risks are also likely to be very high. If someone is selling you an investment where they are just emphasizing the returns without disclosing the risks that should be a red flag.

One of the greatest risk management tools is diversification. As the saying goes; “don’t put all your eggs in one basket.” Always invest in different asset classes. Even within one asset class invest in different categories of the asset. For instance, invest in real estate and stocks as two different asset classes. In real estate, invest for example in rental and commercial real estate as different categories within the asset class. In stocks, invest in different categories e.g. manufacturing, agriculture, financials, energy, ICT etc

Because of risk inherent in investment, you need to be aware that you can lose all the money invested. Neither return on capital nor return of capital is guaranteed. Don’t invest what you can’t afford to lose or you will in the end lose yourself to stress.

2). Understand your personality and how it influences how you invest – You should also understand your risk management personality, risk profile and risk carrying capacity. Are you a risk taker or risk averse? If you are a risk taker be careful because you are more likely to be driven by impulse. This makes you susceptible to making bad investment decisions

If you are risk averse be careful not to become a captive of fear and analysis paralysis. This makes you susceptible to missing investment opportunities. You will end up always getting into a party when people are on their way out and wondering if you are bewitched.

There is saying; “break bones when you still have teeth.” When you are young and with fewer financial responsibilities your risk carrying capacity is high and it is the best time to invest. You make mistakes early and learn early. You also benefit most from the power of compounding