What You Need to Know BEFORE You Invest
Folks really want to talk about how to invest, what to invest in - that's a conversation that could take all year. Here are a few things to get straight in your mind before you make your next investment.
How much do you have to invest?
The reason I start the “face your finances” webinars with establishing how much you make, spend and owe is because the difference - what you have left over - is what you should be investing. You have to have a strategy for what you’re spending, a strategy for repaying debt and a strategy to know what you’re making before you’re ready to invest. If you haven’t established where you’re money is going, you’re not ready for the stock market, real estate or crypto. Get a plan for your “regular” money, so you’ll know what you have to invest.
Let’s assume that you’re clear on what you have to invest - where is the money coming from? Do you have a lump sum of cash or do you plan to invest a certain amount monthly or quarterly? Your investment schedule, should affect the types of investments that you choose.
What is in your portfolio right now?
Your portfolio is all of your current investments - your stocks, your mutual funds, your real estate, even collectibles. You may have a portfolio, even if you don’t know it - your 401k or retirement fund at work, your home, anything that is an asset may be a part of your portfolio. Figuring out what you actually have will lead you to the next question in evaluating investment opportunities.
What is your objective?
Making money is NOT an objective, it's a result. An objective is to earn income or sell the asset at a profit. What do you want to do with the investment? If you’re buying to hold it - how long - how will you know when it is time to sell? If you’re buying to “flip” it - how will you know when you’ve made the profit? If you’re using it for income, how much income do you expect to earn - what expenses are involved, how will you track your profits? What are the consequences if your asset doesn’t produce your objective within the time frame?
Does this investment align with your portfolio? Is it riskier than your current investments (think: crypto and business start-ups) or is it less risky (think: established stocks or real estate)? Can you afford this level of risk - can you afford to lose this?
On a slightly unrelated note - all of this is why I don’t recommend that people use “investment” apps like Robinhood and Acorns. While they may allow you to buy and sell stocks and other investments - they aren’t the best way to manage your portfolio. These apps are focused on individual trades, one stock, one mutual fund, but no strategy. The process of analyzing each investment against your overall goals is called “portfolio management” - but it’s really just making sure that each “investment” is right for you. If you don’t understand how the investment fits into your goals, then it’s probably not right for you!