Abiodun Doherty
| credits: File
| credits: File
Do not follow where the path may lead. Go ahead where there is no path and leave a trail – Unknown
Choices. Choices. Choices. We all make
them. Every time. There are always multiple choices and multiple
consequences. And we have to live with the consequences of right or
wrong choices. Yet, not making a choice at all is almost always worse
than making a wrong choice. Life is a risk.
Going out and coming in carries its own
risk but sitting at home and doing nothing because you want to avoid the
risk of going out may lead to death faster than going out. Yet,
foolhardy decision making is not the path to take but careful evaluation
of options and consequences may help you reduce your margin of error
and guarantee greater success. And if there is a list of top ten areas
where, ultimately, the accuracy of your choices is necessary, it is in
the financial consequences of your choices.
Wealth creation has often been the
fascination of men. From the rush for gold in El Dorado to the search
for diamond. From the search for oil to the search for greener pastures.
We are always seeking. And this is no different in real estate
investment and wealth creation. There are many vehicles and there are
many destinations. A wise person will choose his or her destinations
carefully by first choosing the right vehicle. For, despite your best
wishes, the wrong bus, train or plane can only drop you at the wrong
destination except you change the vehicle and you do it fast.
Many people enter into real estate
investment with the mindset that any vehicle they enter will take them
to the right wealth creation bus stop. They fail to consider a few
factors such as time and risk. When you arrive at a destination is as
important as the vehicle you take. By taking the wrong vehicle your
delayed arrival at the right destination may frustrate your purpose. For
instance, two individuals having the same amount of money to invest in
real estate may attain different financial results because of the type
of real estate investment they choose. One of these two investors might
become a millionaire in 10 years, while the other may attain the same in
twenty or may even loose his or her investment outright.
Also the quantum of risk each investor
is willing to carry differs and the possibilities attached to those
risks are different. The good news is that real estate investment is one
of those investments that carries a lower amount of risk and thus
protects you from greater consequences in case of errors. For instance,
if you buy a low growth area by error or ignorance the appreciation rate
for your capital may be slow and low but at least your capital is safe
and secure. Many other investment vehicles are not so generous. A
mistake will often cost you your entire investment and put your finances
in jeopardy. Thus, we need to tread carefully.
The starting point of a good decision
making is to determine the goal. Why do you want what you want? Your
goal must be S.M.A.R.T. It must be specific, measurable, articulate,
realistic and time-bound. For instance, are you going into real estate
investment because you are planning for your retirement income? If so,
what amount do you think will take care of your projected standard of
living? When will you retire? Which real estate investment vehicle is
likely to take you to that destination within the time available? You
can then work backwards from that point.
This stage also requires a correct
analysis of where you are at the moment. What is your net worth? What
are the resources available to you that could help you in the attainment
of your visions and dreams? Are you already in the wrong vehicle and
need to cut your losses by getting out fast? Are you willing to trade
some investments for safer and more secure ones? Are you prepared to
restructure your investment portfolio in order to have the right mix of
profitability, risk and security? All these require some thought.
Your investment decision and strategy
should also have boundaries based on information, research and time
tested principles of areas that are ‘no go’. There is always a
relationship between risk and reward. It is your responsibility to
carefully determine your risk level and the quantum of risk you are
willing to take. In almost all investment vehicles, the three primary
risks are financial, liquidity and economic. Economic risk refers to the
effect of inflation on your proposed investment vehicle. If your
investment vehicle does not have the capacity to surpass the rate of
inflation then whatever income it gives you would have a lower
purchasing power.
Liquidity risk refers to the issue of
how fast you can convert your investment to cash. Sometimes the process
can cost you a lot of money. And the process could be slow. Financial
risk is the possibility of losing your money outright due to several
factors that could be far beyond your control.
Whatever investment vehicle you choose
or refuse to choose will expose you to one or all of these forces. For
instance, a man who decides to keep his money under his bed at home
because he is afraid of keeping it in a bank and then losing it.
This person’s sole focus is security of
funds and total avoidance of risk. But is that possible? Assuming that
the money was not stolen, every single day that the money earns nothing,
the same amount is becoming less not in quantity but in its capacity.
Because of inflation, two years later, he would be able to buy less with
the money and thus has effectively lost money.
No comments:
Post a Comment