Dealing with Risk in Investment Groups

It is no surprise that investment groups struggle with decision-making. Recently, we run a clinic for an investment group that had struggled with this particular issue for quite a while. Interestingly enough, this group did not have the usual problems of contributions, non-attendance in meetings, execution etc.  When they did finally make a decision it was executed pretty quickly. The lethargy over decisions for them was all about risk. They had different personalities in the group who had different levels of risk appetite. As much as they wanted to be rich (like all Chamas do), they were just not being able to balance the equation.  When it came to actually putting money where their mouths were, some people instantly became risk averse. Others wanted to wing it and put it all in a single investment.  Others wanted to spread it out.  Result is that many meetings were ending with; “lets go an research a bit more”.  You may be experiencing this same scenario in your investment group.  If not directly, this misunderstanding of risk may be covered up in other symptoms such as lack of contributions or no execution.  So what can your Chama do to get unstuck? Even if you are not in a Chama these points may help you with your individual approach to investments.

Firstly accept that there will be risk.  There is no guarantee on anything. Accepting risk is accepting that there is probability you will loose money.  Nobody ever became wealthy without taking risks and many times without loosing money. Since you want to create wealth you will have to accept risk as part of the package.  The motive for coming together as a group is to pool resources and do things that you ordinarily would not be able to do as group and consequently be able to take risks that you would not be able to take as an individual.  For example if I invest Kshs 100, 000 and it doesn’t do well, I could loose Kshs 100, 000.  But if I do the same investment with a group of ten people, the personal loss to me is Kshs 10, 000.  You are not in an investment group to stay in your comfort zone. If you are doing the same type of investments you would be comfortable doing as an individual, then there is something wrong.  You are not leveraging the power of pooling resources. Secondly address the issue of individual risk personalities. Most groups have not gotten to the stage of identifying the risk personality for the group so they bring their own personalities to clash at the table.  Your group must sit down and define what is their objective for being together.  Getting rich is not an answer.  Get rich so that…. is what needs to be defined.  For example this group I was working with decided they wanted to eventually buy homes for everyone.  To me that is a clear objective.  Others have also defined it as retirement, education for children etc. If it’s a sum of money or value that you want to have then specify the amount.  Defining this objective will make you understand what level of risk the group or the company needs to take. Is what you are working towards strong enough to make you do something different? This shift from individual risk appetite to company risk appetite is very important.  Rather than asking what risk level am I comfortable with, ask what risk does the group need to take to reach our objectives.  Most probably you will need to take moderate to high levels of risk to get where you need to go.  Keeping money in a bank account will just not work.

That not withstanding, I have seen groups taking too much risk by investing in things they do not understand or have time to monitor. I worked with a group that lost a lot of money by investing in a children’s entertainment business.  They learnt the hard way that they did not actually have time to run it and had completely misunderstood how that particular industry works. If you do not understand it let it go.  Even as you do take some risk you should understand why you are doing it and what you are investing in. If you do understand that, you will also know how to mitigate risks.  You may invest in shares, which have some risk but since you have understood those factors, you know what systems to put in place to ensure you always have the right information to make a decision. You may also put boundaries on how much of a dip you will take.  For example your group may establish a policy that if a stock dips by more that 20%, you would sell it. If you decide to go into farming you can mitigate risks by taking out some sort of insurance for the crops. Lastly remember that risk is not just limited to investments. Lack of structures in your investment group may pose the greatest risk.  Lack of execution mechanisms means you lose money everyday by not handling transactions in a timely manner, lack of policies to determine what you will or will not invest in means you lose time by going round in circles, lack of proper communication channels between shareholders may mean people are perceiving the group to be more risky then it actually is or may result in people leaving the group, lack of accounting may mean money can be lost or trouble with the tax man. Structures give people confidence and allow them to accept risk. As I’ve said before, the greatest financial risk is not taking any risk at all.