GOOD DEBT VERSUS BAD DEBT

By Peter Owaga

Riches: we all want to be rich; we all wake up every morning with one thought in mind concerning our future, “I wanna be a billionaire so freaking bad.” JI like to refer to this as the commercialisation of the human race; where one’s worth is measured by their bank balance. Where we are inundated by archetypes of the power of wealth; from fast and loose cars and women-in that order of course. Then comes the question, how do we get there?

                 

Robert Kiyosaki and many more wealthy people like him who write many books about how they want to make you rich will tell you about the power of debt. In fact, they go as far as to tell you how to distinguish between bad debt and good debt: bad debt is the loan you take to buy a Range Rover sport yet you live in a rented house that is barely furnished; whilst good debt is the loan you take to build high-rise apartments (hopefully there is no one who will come and pull a Syokimau on them. J What they all forget to intimate to the populace is that debt has to be eventually repaid. Be it a loan from Paul taken to pay Simon; a loan taken from a bank to develop flats that will be later be demolished; or even a loan taken from a local Shylock whose interest rates are more exaggerated than Kim Kardashian’s assets.

Repayment of loans is what drove the United States of America to a recession that caused ripples all across the globe. This was a perfect depiction of the saying that goes ‘when a giant sneezes, even the flies get a cold.’ So, how did this Goliath fall? Simply put debt.

The CMA is in the process of putting across a bill that will see the transfer of loan default risks from the banker to the securities holder. This will see the banking sector receive a much needed boost; by enabling a highly charged asset backed securities market. This means that if a bank has outstanding mortgages, which initially would mean that before it issues any other loans it had to ask for more deposits (that means no more “mtaani agents” so as to woe customers, no more “look at me, now look at you” advertisements to make you feel bad about yourself). But as is often the case, never look a Trojan horse in its mouth.

While this is a really revolutionary move, what happens in case there is default in payment? This is the exact question that the US had answered in the worst possible ways. It was akin to a baptismal by fire.

In 2008, the various mortgage takers realised that they couldn’t repay their mortgages due to a rise in unemployment. This then led the banks to repossess their homes in an attempt to resell them at a lower price so as to recover at least a portion of their debt. The only problem is that no one wanted to buy the homes. As a ripple effect, people began selling off their homes as banks raised the lending rates for existing and new loans. Before long, the homes became worthless and the banks were left with nothing but a large hole in their pockets.

So, what lessons can we take from this? Quite elementary really. In as much as debt is required to grow an economy, it is like a double edged sword that will swiftly and harshly run through both the creditor and the debtor. With the CBK raising its base lending rates, and in essence causing other commercial banks to elevate their own; most citizens are left wondering whether it is astute to take up that loan. That means that you won’t feel like getting that Subaru Impreza (or is it impress her?) as soon as you get your first job.

What does this then mean for banks? Back to square one. This is the point where banks go back to treating you like royalty as soon as your account reads a certain amount; this means that they come up with some really attention grabbing advertisement. As one wise man once said, if you borrow 50,000 from a bank and can't pay it back, you have a problem, but if you borrow a million and can't repay, they have a problem.

Good day folks!

ART OF INVESTMENT: FASTLANE TO THE BAHAMAS

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By Yvonne Nduhi.

Ever thought of taking that luxurious and exquisite trip to that wonderful destination in the world that you are always dreaming about just to spoil yourself for once? I’m only guessing that like me before my intriguing discovery you would definitely say that the notion was just a fantasy. Not exactly………They can become realizations by just a single word. Investing!

Understanding these fundamentals of investment can instantly tap into a source of profit returns, hence the reason for Kenya’s recent exploitation in this field. The booming development in GDP and further access of the nation’s resources is creating market for investors as well as carefully defined asset allocation criterion that allows for each person to invest in the category best fitted for any investor based on their age bracket, available assets and savings, as well as preference in ease of asset liquidity in case of withdrawals from a certain investment product.

In this young prime of life, why not dare to be bold and invest in equities put up in the Nairobi Stock Exchange or even private equity from corporate organizations. The vast IT world has empowered investors to take up research on upcoming news by the minute and any financial decisions affecting the company. This in turn gives you an upper hand on knowing the worth of your acquired shares hence you are able to decide when to enter or exit any particular stock. Equities however demand a sense of tactfulness since share prices are bound to vary depending on the financial period of the related company. Periodic losses are thus understandable but can be cushioned when accurate and up-to-date information is achieved. After all; it is said that the riskier the venture, the higher the returns are likely to be.

Not too keen on risk? Or maybe you need your assets in a more liquid form where ease of withdrawal is definite. The money market product is the unit trust fund you ought to invest in. It comes about from multiple investors contributing money to form a cash flow fund that earns a daily yield and is compounded annually. Even better, returns are obtained according to one’s own contributions.

These returns are brought about from investment in treasury bonds and bills, fixed deposits; bank calls accounts and corporate bonds which constitutes the acquired money market yield. At this time of the treasury financial quarter, rates are rising especially now that the Central Bank rate is at its peak of 8.00% up over 300 beeps from the start of the year is conditioning the interest and yield rates to go up hence favoring money market fund. Pension schemes are thus encouraged to take up a larger percentage of its investment portfolios under this class as it is unexposed to losses and repurchases for retirement benefits are easily accessed.

Then of course we have the real estate property investment. The hard core of the investment world is what it’s said to be as maximum capital funding is of the utmost necessity since lack it on an oncoming project of its kind may lead to deferment in this investment class. It is without a doubt proven to be the crème de la crème of its asset allocation type with the highest return. Land being its greatest resource in this asset category makes it a natural product, shielding it from depreciation. This thus allows it to scoop the highest demand in the investor market. With the current economy and financial times, land supply is becoming less than its demand bringing about elevated land rates and rents making indulging in real estate worthwhile. Residential, commercial and hospitality property investment are really taking up Kenya’s investment portfolios up a notch as a result of their marketability. In addition, I honestly think property investment, if taken up intently as seen in South Africa and The United States (countries already in the know of its profound ability) can prove to be a rewarding investment for us too.

Laughing all the way to the bank yet? If the above mentioned trail of investments has captivated you enough to take up on action, I am definitely sure you are not just laughing but also stocking up your stacks for that dream expedition that we could only daydream about paragraphs ago. So I am almost sure courage to go big and take a bolder leap to offshore investment is showing up right about now….Voyage Investment seems like it gets better by the level doesn’t it?

We now encounter South Africa’s Hi-Alpha equity fund, interact with Standard & Poor‘s stocks in USA as well as Nikkei’s from Japan. Corporate bonds from Italy are also an option. Here nonetheless, one needs to get their facts straight and as they come pertaining to the desired offshore product as they are recorded to be the highest to succumb to risk volatility. Recent incident has demonstrated the need for this. Mishandling and insufficient funds in the Greece bond in the previous financial quarter resulted in Europe positioning them in a debt crisis whose impact was too much to handle; and in an effort to cushion the situation, it pulled the Euro currency down.

Other forms of investment that are hardly ever exploited in Kenya but can prove to be of promising and economically uplifting outcomes if only keenly looked into through constructive and innovative business strategies are viewed next. Commodities like gold ,oil and copper with  derivatives, a foreign exchange investment  approach  that deals with currency and bank rates negotiations is invested in by developed countries and  go a long way to raise them  economically allowing them to have empowering financially dynamic nations, but with the necessary concerned skills acquired for exact investment propositions involving these asset allocation kind.

Now that we have the bigger picture in mind, let’s put this initiative to practice. With the credit crunch going on, not just in Kenya but globally, it goes without saying that a hands-on participation to put together an investment portfolio best suited for your standard of living is necessary. This will in turn go a long way to help withstand recession and crises that are threatening to emerge. In this investor’s ‘playground’, the silent rule  that more often than not seeks to stand states that aggressiveness in this realm rewards BUT extensive research skills and an insightful way of thinking must go alongside it making it the yang and yang of asset allocation. Who knows, the next Warren Buffett is most certainly reading this ready to tap into ground breaking and unexploited investment propositions that this dynamic world has to offer. Still thinking the dream vacation is a fantasy? Not quite. See you in the Bahamas!