Retirement planning – Investment options (I)

Several weeks ago, we discussed retirement benefits planning. In doing so, we introduced government-regulated and, rather tangentially, individual plans. The intersection of the two plans is the occupational pension scheme (both defined contribution and defined benefit plans). At this point, however, we want to take up, in greater detail, the private, voluntary and independent investment […]

Several weeks ago, we discussed retirement benefits planning. In doing so, we introduced government-regulated and, rather tangentially, individual plans. The intersection of the two plans is the occupational pension scheme (both defined contribution and defined benefit plans). At this point, however, we want to take up, in greater detail, the private, voluntary and independent investment plans that individuals can develop on their own.

Private investment plans: For our purposes here, we shall define a private investment plan as a consciously developed volitional investment proposition that individuals can work on towards enhancing their wealth and achieving a financially secure retirement. Obviously, it will be a function of several variables such as our individual aspirations during our working lives and for our retirement, available investment options/opportunities, the resources (in the widest sense of the word to include both the financial and non-financial) that we can raise/provide, our financial literacy and skills, the performance of both the local and global economy over the long run, etc.

Private investment plans are important as they help us achieve a more secure future, over and above any limits that may be ‘imposed’ by the regulated occupational pension schemes, through at least three ways. First, they make it possible for us to do more with our resources than may otherwise be achieved without them. Secondly, they help smoothen the rough edges and any inefficiencies of the regulated schemes that we may already be participating in. Third, as long as we operate within the ambits of the law, there is no limit to what we can aspire and work to achieve for ourselves, our families and contribute to our communities in our retirement years.

The principles of making private investments are as follows:

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1. Do only what you are allowed to do by law: This means all our investment activities should be sanctioned by law both in terms of what we do and how we do them.
2. Do what you understand and are comfortable doing: This means we shouldn’t do what stresses us or gives us sleepless nights because we don’t understand it. Let’s operate within our comfort zone!
3. Engage the professionals: It is always important to engage professionals in making investments or in fact, in divesting as well. This, however, does not mean abdicating your responsibility.
4. The buck stops at your desk: Professionals can always provide us with information, advisory services, guidance and opinions. However, the buck really stops at our desks and all decisions should be ours and our responsibility.
5. Stay on top! Whatever we may be investing in, we would need to stay on top of it to ensure we create the maximum value possible and extract the most benefit out of it. Staying on top of an investment means monitoring it closely enough to be able to cut out on losses timely as may sometimes be required.
6. Be aware: In making investments, you can lose money as much as you can gain. If anything, for most transactions and investments, there are more statistical chances of suffering losses than making gains. This means we need to stay on top of whatever we are doing as mentioned above.

Investment options: Quite honestly, our country offers almost limitless opportunities for businesses and investments. Unfortunately generation upon generation, we have yet to scratch the surface. There are indeed militating challenges, but they should not be limiting factors. Thankfully, these opportunities are still available, with ever-emerging ones, and we can always, individually and collectively, seize them.

We define investment here to mean the acquisition of an asset with the objective(s) of generating cash flow, income, capital appreciation or value protection. When we build and rent out a residential property, we expect to earn monthly or annual rental income as well as capital appreciation if we opt to sell the property in the future.  Similarly, if we purchase UBA plc. shares we expect to earn dividends and share bonuses over the years as well as capital appreciation if we decide to divest in the future. We can also invest funds to start a business or buy into one, to make profits and grow the business over time. An investment, therefore, is simply a medium or mechanism for generating future cash flow, income and capital appreciation that beats inflation. This is done by creating value or providing the means for value to be created.

Based on our definition, we can easily classify investments into two viz, passive and active investments. ‘Active investments’ are those in which we will be fully involved in running its ‘operations’ and generally ensuring that it is liquid, profitable and growing. If we invest in a poultry farm, I would expect that we would be substantially hands-on (supported by systems and processes) in running its operations, except, of course, we invest in an operation that is already being run professionally and we choose to be passive investors. On the other hand, if we invest in UBA plc. shares, we do not expect to replace the Board or management in running the bank’s affairs, unless, of course, that was part of our motivation for the investment in the first instance. Instead, we are happy with the Board and management running the affairs of the bank and delivering good results. This is an example of a passive investment. As we shall see later, though, passive investments require their type of monitoring that must not be taken lightly. Both passive and active investments can be further sub-classified based on whether it is local or international.

Depending on our dispositions, capacities, plans, interests, resources, aspirations, etc., passive or active investments might be best suited for us. Thankfully, most of us can mix up between the two, perhaps with a preponderance of one over the other, thereby generally helping to diversify our portfolio.

Next week, we will take up specific active and passive investment options.