A 30% fall needs a 42.86% rise just to get back to where you started. Wanjiru, who sells mitumba at the Githurai 45 market, did not believe it until she worked it out with her own KES 20,000 on the back of a receipt book. It turned a warning she had heard many times into a number she could see in her own handwriting. That one calculation changed how she thought about investing more than any advert ever had.
Investment risk for beginners is usually explained with a vague line: "markets go up and down". That is true but not useful. What follows breaks risk into the specific things that can go wrong, shows each one in shillings, and explains what you can actually do about it.
This post belongs with our wider guide on investing for beginners in Kenya, which covers the order of steps. That guide explains when to start, while this one explains what can go wrong once you do. Most of the risks below are shown with Wanjiru's KES 20,000, so you can see their size in shillings rather than in theory. Read this part before you put money anywhere.
Risk means you can get back less than you put in
In plain words, investment risk is the chance that your money is worth less when you need it than when you put it in. Share prices can fall, and you can get back less than you put in. Sometimes the fall is small and short; sometimes it is large and lasts years. Both kinds matter, because even a short fall hurts if it arrives on the day you need the money.
Risk is also the reason investments can grow at all. Nobody would pay for the chance of growth if there were no chance of loss. Any offer that promises growth with no possibility of loss is either misunderstood or dishonest. If someone shows you growth without any mention of loss, ask what they have left out.
Past results do not promise future ones. A share that rose for five years can fall in the sixth, and a chart of past gains tells you about the past only. History is still worth reading, because it shows how far and how often a price has swung. What it cannot show is the next swing, so treat it as a guide to risk, not a forecast of returns.
Why falls hurt more than rises help
Losses and gains are not equal, even when the percentages look alike. This is the arithmetic Wanjiru worked out. When your money falls, it falls from a bigger number; when it recovers, it rises from a smaller one. So the percentage rise needed to get back is always bigger than the fall. The table shows it with her KES 20,000:
| If KES 20,000 falls by | It is worth | Rise needed to get back to KES 20,000 |
|---|---|---|
| 10% | KES 18,000 | 11.11% |
| 20% | KES 16,000 | 25% |
| 30% | KES 14,000 | 42.86% |
| 50% | KES 10,000 | 100% |
Look at the last row. Halve your money and you need it to double just to break even. Even the 30% row asks for a rise of 42.86%, which is the figure that first surprised Wanjiru. This is why avoiding big losses matters more than chasing big gains, and why putting everything in one place is so dangerous.
The six kinds of risk a Kenyan investor faces
- Market risk. The whole market falls, carrying good companies down with bad ones. Spreading money does not stop this, but time can help.
- Company risk. One company has a bad year, a scandal or fails. Spreading money across several companies limits this.
- Currency risk. US shares are in dollars. If the shilling strengthens while you hold them, your shilling value falls even when the share price does not.
- Timing risk. You need the money during a fall and must sell low. A savings cushion and a long horizon reduce this.
- Platform and fraud risk. The firm holding your money is unlicensed or dishonest. Checking licences and avoiding promised returns protects you here.
- Behaviour risk. You buy because everyone is excited and sell because everyone is scared. A written plan is the best defence.
Wanjiru's KES 20,000: three tests on paper
Before investing, Wanjiru runs three "what ifs". The figures are illustrations, not predictions. Each test takes one of the six risks above and puts it in shillings. She does them in her receipt book, before a single shilling leaves her savings. The point is not to predict what will happen but to see whether she could live with it.
Test 1: one company against five. If she puts all KES 20,000 into one company and it falls 60%, she is left with KES 8,000, a loss of KES 12,000. If instead she spreads it as KES 4,000 in each of five companies, and the same company falls 60% while the other four stay flat, she has KES 17,600. Her loss is KES 2,400, or 12%. The bad company was just as bad; spreading limited the damage.
Test 2: the shilling moves. Suppose she buys when the rate is KES 129 to the dollar, an assumed figure, so her KES 20,000 becomes about $155.04. A year later the share price is exactly the same, but the shilling has strengthened to KES 118. Selling then gives her about KES 18,294.57, a loss of about KES 1,705, or 8.5%, without the company doing anything wrong.
Test 3: the bad month. If her stall has a slow season and she needs KES 10,000 for rent during a 30% market fall, she would have to sell at the low. Selling at that moment would lock in the loss, and her own table had shown how hard such a loss is to win back. That is why she decides to invest only after her rent cushion is separate and full.
After the three tests, Wanjiru decides to start with KES 10,000 spread across several holdings and add to it monthly, rather than all KES 20,000 at once. Each part of that decision answers one of her tests. Spreading answers the first, and starting with half rather than the whole sum keeps more of her money out of the market while she learns. The second test, the shilling, is one she cannot control, so she accepts it as part of investing in dollars. Adding monthly also means she never puts everything in at one unlucky moment.
What you can control, and what you cannot
You cannot control markets, the exchange rate or a company's results. Anyone who claims they can is selling something. That still leaves a good deal in your hands, and most of it is decided before you invest rather than during a fall. The things you can control are these:
- How much you invest. Only money you can leave alone for five years or more.
- How spread out it is. Several companies and sectors, not one name.
- When you put money in. A steady monthly amount instead of one big bet on one day.
- Your cushion. Enough savings that you never have to sell in a hurry.
- Who you trust. Licensed firms, clear fees, no promised returns.
- Your reaction. Decide in advance what you will do in a fall, and write it down.
Know your own limit
Ask yourself one question before every investment: if this fell by a third tomorrow, would I lose sleep, or change how my family eats? If the answer is yes, invest less. Your risk limit is set by your life, not by what your friends are doing.
How Nyanyuka approaches risk
Of the six risks above, Nyanyuka's design speaks to two. Timing risk is the reason Invest stays closed until your savings reach KES 13,000: the cushion comes first. Company risk is easier to spread because you can buy parts of NYSE shares, so KES 10,000 like Wanjiru's can go into several companies.
Market risk, currency risk and your own reactions stay with you. NYSE prices are in US dollars, so both the share and the shilling can move against you, and prices can fall. Nyanyuka guides the choice and places orders through its broker partner, but the decision to buy or sell is yours, and so is the written plan. To understand how members' money is handled and recorded, read is it safe, and for the full picture on how to invest in US stocks from Kenya, see the main guide.
Part of: Investing for Beginners in Kenya: Where to Start
Frequently asked questions
What is the biggest risk for a beginner investor?
Often it is not the market but the timing of your own needs: having to sell during a fall because an emergency arrives. A savings cushion and investing only long term money reduce this a great deal. Putting everything in one company is the next big risk.
Can diversification stop me from losing money?
No, it limits the damage when one company does badly, but it cannot stop a fall that hits the whole market. In Wanjiru's example, spreading turned a KES 12,000 loss into a KES 2,400 loss. It reduces risk; it does not remove it. Market risk and currency risk stay, so prices can still fall and you can get back less than you put in.
How much of my money should I put at risk?
There is no correct share for everyone. Start from the money you can leave alone for five years or more, then picture it a third lower and ask whether your family's life would change. If it would, invest less until the answer is no. Wanjiru's answer was to start with half of her KES 20,000, which is the kind of adjustment this question leads to.
How long should I stay invested to reduce risk?
A common view is five years or more for money in shares, because it gives prices time to recover from bad years. Time does not remove risk, and a long period can still end lower. Only invest money whose date is far enough away that you could wait. Investing a steady amount each month over those years also avoids putting everything in at one unlucky moment.
Wanjiru tested KES 20,000 from her mitumba stall on paper before investing a shilling: one company against five, a stronger shilling, and a bad month. The six risks every Kenyan investor faces, shown in shillings, and the ones you can control.
Check how Nyanyuka keeps money safe →