OPINION: Starting your wealth building journey? Here is what you need to know

Wealth building has long been perceived by low-income earners in Kenya as an unachievable goal. However, the reality is that wealth is rarely built from income but through consistent informed investment decisions made over a period of time. The journey must start by understanding how investments work, have a clear plan, and the discipline to stay consistent.

Additionally, as investments opportunities become more accessible and information becomes readily available, there is need for individuals to learn how to distinguish sound investment opportunities from costly mistakes that may make them lose their money.

Whether you are considering building wealth through stocks, bonds, property, or a money market fund, fundamentals of good investing from costly mistakes remain the same. Here are five principles every investor should understand before putting their money to work:

Before you put your money into anything, you should be able to know what is actually generating the return. Every investment is a purchase of future value. When you buy shares in a company, you are betting on that company's future earnings. When you invest in property, you are counting on rental income or the property appreciating in value over time.

If someone cannot clearly explain to you what is driving the returns on an investment, that is a clear red flag. Take your time, ask for real numbers, and do not let anyone rush you into a decision.

2. Base your decisions on facts, not stories

Every genuine investment can be evaluated using financial data. Investment professionals look at cash flows, compare similar assets, and analyse the numbers to determine whether something is worth investing in.

If you are not sure how to evaluate an investment on your own, that is completely understandable. It is one of the key reasons why working with a professional investment advisor is highly advised. They can help you look beyond the narrative and focus on what the numbers are actually saying.

When you see a lot of people rushing into a particular investment, it can feel like you are missing out on something. Do not let that pressure drive your decisions. The number of people investing in something does not determine its value. In many cases, what looks like widespread confidence is simply well-marketed hype, so always go back to the fundamentals.

4. Understand how easily you can access liquidity

Liquidity refers to how quickly you can convert your investment back into cash when you need it. Different assets behave very differently in this regard. A money market fund, for example, can typically be accessed within a few days. Property, on the other hand, can take months or even longer to sell at a fair price. Before you invest, ask yourself whether you might need that money in the short term, and make sure the asset you are choosing matches your actual needs.

5. Understand the risk attached to what you are investing in

Every investment carries some level of risk, and a trustworthy investment manager will always be upfront about that. Bond valuations, for instance, can fall when interest rates rise. Being able to identify and understand the specific risks of an asset is a sign that you are dealing with a legitimate investment opportunity. If someone tells you an investment is completely guaranteed with no possibility of loss, treat that as a warning sign rather than reassurance, because there is no such thing as a risk-free investment.

The journey of wealth building requires consistency and discipline. Start with lower-risk options, ask the right questions, and work with a credible investment advisor to inform you about the right investments to make. The journey to wealth-building might be lengthy but it will be completely worth it in the long-run.

The writer is the Chief Executive Officer, Absa Asset Management Limited