Being a successful investor is the holy grail isn’t it? Being able to sit back and not work and live off rental income and dividends. Periodically selling off one or two assets when the market is favourable and reinvesting when the market takes a dip. While financial independence seems like something that many people aspire to achieve, not many people are able to do so. The reason for falling short is the failure to plan ahead. Typically something causes one to have to cut short their investment journey. Life exigencies may require assets to be sold at less optimum periods of time. Some may give up on the idea of investing altogether because they are unable to stomach the wild fluctuations that are part and parcel of a working market.
In my personal opinion, before one starts investing, these are the things that he or she should get in place. These considerations will put in place the foundation for one to achieve favourable results with his or her investments.
- Buying insurance
You want certainty in life. You do not want fluctuations and shocks to your system. Contrary to what a lot of people say, very few people are contrarian. In almost all cases, people want to be able to live a life where there are little changes to their daily routine. Insurance provides one with a great degree of certainty.
Imagine these two scenarios.
In the first scenario, a person does not buy insurance. He is investing $1,000 every month into his portfolio. He unfortunately is hit with a serious illness. He has to fork out tens of thousands of dollars towards treatment of his serious illness. He has to stop investing that $1,000 every month.
In the second scenario, a person buys insurance that costs $200 a month. He is investing $800 every month into his portfolio. He is unfortunately hit with a serious illness. The insurer is the one that pays for his treatment. He continues investing every month.
What you want when you invest is certainty. The ability to continue with your investment plan over the long term. You do not want anything to derail your investment plan. If you tell a person that he has to fork out a certain amount over the long term he will most probably be fine with that. This is why you see individuals with mortgages lasting in excess of 30 years. Remember that when you take on a mortgage, the lender is most likely going to require you to purchase a mortgage insurance. Hence in the event that you become ill and are unable to work, your mortgage is taken care of.
The best investors all have this sorted out. They deal with the variables outside of investing. This is to ensure that they can stick to their investment plan. In the long run, the market tends to trend upwards. Hence even if your investments take a hit because you entered the market at a less favourable stage, things are likely to work out over ten to fifteen years.
- Paying off debt
I do not mean that you have to be debt free before you start investing. However, if you have multiple loans and credit cards on overdraft, then you should seek to clear almost all, if not all of such debt before you start investing. This is because it is very easy to trip up on repayments of such debt. In many cases, you missing a payment would result in additional interest being levied. This adds additional unwanted debt. Therefore, it is essential that before you start investing, you try to clear up most, if not all of your debt. In your investing journey you may also take on additional debt. Most commonly when purchasing a property and obtaining a mortgage. Therefore, if you own monies to financial institutions, it may affect your ability to obtain a mortgage. If there is such a thing as good debt, then leveraging on a property should be a good debt.
- Determining your risk profile
I have had individuals purchase a property or a stock and constantly look at other properties and the stock market constantly. They tend to inject self doubt over their investments and fret over whether they entered the market at the “best price”. For starters, there is no such thing as a best price or a best time. The best time to purchase a property was last year. However, because you do not have the ability to turn back time, then perhaps it is best to see what you can do moving forward. Instead of determining the best price and time, one should, more importantly, determine his or her risk profile.
You can use many resources to determine your risk profile. For starters, all insurance companies have a series of questionnaires to determine a person’s risk profile. Typically you will be categorised as low, medium and high risk. Moving from there, you will then determine the asset allocation that should follow that risk profile. Take some time to research online as to suitable asset allocation for a particular risk profile. Perhaps for your particular risk profile you are suitable to have 50% of your portfolio in equities with perhaps another 30% in fixed income or low risk investments and maybe another 20% in cash or cash equivalent. As to where properties are situated in your portfolio, you will have to make that determination. For me personally, if it is properties in Singapore, I would place them in equities. My personal take is that Singapore properties are risky for the combined fact that prices are at an all time high and they are purchased with leverage. For overseas properties, they should be placed firmly with equities as they not only carry an investment risk but also an exchange rate risk. For example, if you are a Singapore who purchased properties in Thailand, you will not only have to grapple with the fact that the price of that property may fluctuate. You will also have to deal with the fact that the Thai baht may depreciate against your home currency, i.e. the Singapore dollar.
- Coming up with an investment plan
Now that you have settled my first three pointers, you are ready to come up with an investment plan. Typically, it would involve some periodic investments. Maybe you will make purchases of $5,000 worth of equities every three months. Maybe it may be putting aside all of your bonuses to investments. Whatever the bonus amount, it goes into the market. Sometimes it may be selecting a portfolio of stocks and setting an entry price. The price may not be a hard price itself but maybe if the stock is trading below a certain ration, say price to earnings, then you will make a purchase of a certain amount. Once you have a plan, you should stick to it. There will be a lot of noise from various sources. Your job is not to be distracted by such noise and to focus on the plan that you have created for yourself.
Now can you see how a large event can throw you off your investment plan and hence I suggested taking care of such scenarios through insurance?
- Letting the people who need to know about your investment plan
You do not live alone. You may have a family who depends on you to provide for them. You may be married, or not. You may have a significant other who expects you to be open with what you intend to do with your money. You should be honest with the people who are closest to you. If you have an investment plan, do sound it out to your significant other and anyone else who should be informed of it. Your spouse may want to splurge on a holiday when you get your bonus. It is important for you to sound out to him or her that you intend to set aside that money to be invested. In fact, if you let them know about your investment plans, there is always the chance that the people closest to you may want to partake in the same investment journey. This is why you see so many family members coming together to invest in property and other financial assets. Whatever the case, you should always let the people who need to know about your investment plan.
Well that is a wrap. I do not think that these five considerations are your only considerations. They are certainly what I would do. If you are thinking of starting your investing journey, it would do you little harm to complete these five considerations.
Remember, it is never about when you start investing. It is always about how and for how long. If you put a long enough time horizon before you, your investments should reap the benefits over the long run. In fact, the economic cycles have been growing increasingly short. A long run in current terms may not need to extend beyond ten years.
Yours sincerely,
Daryl
