I earn Sh30,000, where can I invest?

Hi Dr Pesa, 
I am 23-years-old. I just graduated from campus and landed my first job. I am earning Sh30, 000 a month. How much and where can I invest to boost my savings?

Dear future investor,
Congratulations as you start earning! It is always a great feeling, to see the fruits of your labor. Very empowering. This puts you on an incredible path to wealth creation. Before we get to the actual process of investing, it is important to note a few foundational points. 

Firstly, investing is a long-term journey for wealth creation. The growth of your investments will not happen overnight, but through the power of compounding, they will accumulate over the long term. It will require a great deal of patience.

Secondly, you will need to understand your own behavioral biases that you may be predisposed to. We have two main behavioral biases that investors exhibit. Emotional biases are those that arise from emotional reactions such as loss aversion (the preference to avoid losses as opposed to achieving gains), regret aversion (the fear of losing out, or avoiding an action lest you regret if it doesn’t go according to plan) and overconfidence bias (an unwarranted belief in your abilities or capabilities) among many others. 

Cognitive biases are those that deal with faulty reasoning or inadequate processing of information. These may include availability bias (giving more importance to information that is easily recalled) and illusion of control bias (the belief that you can control the outcome of an event) among many others. I would encourage you to go on line and read about these biases.

Thirdly, we all go through several phases on our career paths. These phases have been grouped into four stages. The first phase is the foundation stage. This is where all the learning takes place from nursery, primary school, high school and college. Then comes the accumulation stage where an individual has started earning and is beginning to accumulate financial resources. This phase is also coupled with major expenses such as advancing in learning, getting married, having children and taking care of their education expenses and so on and so forth. 

After the accumulation stage, an individual enters the maintenance phase. This is when you have advanced into the later years of your life and more often than not you have retired from your active daily employment. It characterized by the desire to maintain a certain lifestyle and financial status. What becomes of crucial importance at this phase is wealth preservation. The ability to take risks begins to decline and the need to reduce exposure to risky assets also rises. Some individuals begin to think and plan for the distribution of their wealth at this stage. Then the last phase is the distribution stage. Here is when you start distributing wealth to other people or entities. This may be in in the form of gifts, charitable donations, philanthropic activities or setting up a trust for your subsequent generations. 

Lastly, you need some goals. You need to answer some questions such as, why do I want to save and invest? What are my short term (say 1 -2 years), intermediate (say 3 – 5 years) and long term goals (over 5 years)? How much risk am I willing to take? You can check out for risk tolerance questionnaires online. They can help you get an idea on the level or risk you can tolerate.
Having laid the above foundation, and the general wider scope of investing, let us now jump straight into your question. Given your brief description above, it is clear that you are beginning your accumulation phase. At this juncture your human capital is relatively higher than your financial capital. As you embark on this journey of investing, your human capital will continue to accelerate up to a certain point where it begins to rise at a decelerating pace as your financial capital begins to pick up and rising at an accelerating pace. 

At the age of 23 years, your investment horizon is significant. Your are looking at the next 50 years or so, on average. This improves your risk tolerance level and would call for relatively risky investments such as stocks. I am assuming that you still live with your parents and therefore most of your expenses are covered. If your gross salary is 30,000, find out how much you can stretch yourself and save on a monthly basis without fail. The habits that you begin to cultivate at the saving level will be crucial as you grow in the world of investing. Once you are able to establish a figure you can save every month, open a savings account where you can be putting this money aside. 
To start investing in the stock market, you will need to open a CDS account. You can approach any broker of your choice to can guide you on how to go about opening such an account. You can decide to be channeling the funds from the savings account to your investment account with the stockbroker. 

I am also assuming that your knowledge of the best companies to invest in is still limited. Your stockbroker is in a good position to help you when it comes to picking up good companies to invest in. However, I would highly encourage you to also invest your time in studying the various companies listed at the Nairobi Securities Exchange. Begin to learn how to evaluate a business. Begin to follow what the companies do. How they make their money. Who makes up the management team. Begin to attend the annual general meetings for the companies where you hold a stake. In short, strive to become an active investor! Read and read widely about the economy and other financial news. With time, you will gain confidence and the requisite knowledge to pick out good investment opportunities. Good luck!

Dr Pesa - Bernard Kiarie, is a business and investments analyst working for an international investment bank. He can be reached on [email protected]