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Last weekend, I went out to dinner with some people, most of whom Iād never met before. Upon sharing that I work in financial education, I was met with an enthusiastic array of questions.
The one that always comes up in these scenarios is āhow do I start investing?ā What many people donāt realise is that good investing starts long before you invest the money.
Investing is a bit like building a house. Thereās a lot of planning that goes on before you lay the first brick.Credit: Simon Letch
If you really want to set yourself up for investing success, the part you should focus on is the preparation you need to do.
Itās a bit like building a house. Thereās a lot of planning that goes on before you lay the first brick. In fact, building should be the simplest part if youāve done the preparation well.
Investing isnāt something you should rush into out of a fear of missing out. There is some preparation you can do to make your investment journey more fruitful in the long term.
As part of the preparation process, here are some things you should consider:
Investing doesnāt start with opening a brokerage account and buying an investment.
1. Do you have high-interest consumer debt? Letās say you have an interest rate of 17 per cent on your credit card, and you have a debt that you carry on that card which youāre paying interest on.
Historically, on average, the stock market has delivered a 7-10 per cent return over the long term.
So if you invest money and think youāre going to make a return while you still have high-interest credit card debt, youāll actually be losing money faster than youāre making it.
If you have high-interest debts, one of the best things you can do to lay a stronger foundation for your future investments is to prioritise paying them down as fast as possible.
2. Do you have an emergency fund? An emergency fund is a pool of money that you set aside specifically for potential emergencies. This means itās not used to fund everyday expenses or any goals such as vacations or investing.
As a general rule of thumb, itās a good idea to have three to six months of expenses put aside for emergencies. You donāt have a fully funded emergency fund to start investing. However, you should have some money set aside before you start.
This is because you want to avoid the situation where youāve invested money, you then have an emergency but because you donāt have cash, you sell your investments to fund the emergency.
Once your money is invested, you really want to leave that money alone for a significant period of time or until your investment goal is reached. You donāt want to be forced to sell early.
3. Do you have money youāre willing to put aside for a minimum of three to five years? Investing isnāt a short-term game, especially in assets such as real estate or the stock market.
Often, I get asked where people can invest to get a good return in six months or 12 months, and the answer is: if thatās your time horizon, donāt invest in high-growth assets.
This is because things such as real estate and stocks are volatile. That means you have no idea where the market will be in 12 monthsā time. No one does.
We do know that over the long term, these asset classes have performed well. By long term, Iām talking decades. So while no one can tell you where the market will be in the short term, there is reason to believe that over the long term, certain assets will continue to perform well.
Thereās an old investment saying that goes āitās not about timing the market, itās about time in the marketā. This means itās not about when you get in, itās about how long you stay invested.
4. Do you have some understanding of your risk profile? There are a few different components to your risk profile.
Thereās your risk tolerance (how much risk can you stomach emotionally?). Thereās your risk capacity (how much risk can you afford to take on financially?). Thereās also your risk required (how much risk do you need to take to achieve your financial goals?)
These could all be different for a single individual. For instance, many people are terrified of investing, but it would help them to have some exposure to risk to achieve their financial goals. Others may be keen to start investing, but their financial situation may not be stable enough to warrant taking on that additional risk just yet.
Understanding your risk profile will help you pick an investment option most suitable for your circumstances.
Investing doesnāt start with opening a brokerage account and buying an investment. It starts with laying a strong, stable and secure foundation upon which your portfolio will be built.
Paridhi Jain is the founder of SkilledSmart, which helps adults learn to manage, save and invest their money through financial education courses and classes.
- Advice given in this article is general in nature and is not intended to influence readersā decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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