Factors to consider before Investing

risk tolerance, time horizon, goal, emotion

In a nutshell:

Before you start investing there are a number of factors to consider. It’s important not to overlook these, so you can make the best investment decisions possible for yourself, no matter what point of life you are at.

Key points:

  • Carefully think about these factors before investing
  • Try to evaluate these factors and your current investments annually

Content:

  1. Introduction
  2. Risk tolerance
  3. Time horizon
  4. Emotions
  5. Goals

Introduction

First and foremost, when talking about investing we will be referring to the stock market. Nevertheless, these factors apply to any situation where you are investing your hard-earned money – the stock market, real estate, a private business, your own business and so on.

It is important to think about these criteria. This will help to limit the amount of money you may lose, and make sure you don’t accidently make wrong decisions. For example – investing 100% into stocks when you are planning to retire next year, or invest 100% in bonds when you are 25 years old and have a high risk tolerance.

Risk tolerance

Generally speaking, more risk results in a higher return.

But, what you need to consider is how much risk are you willing to be exposed to? If you are invested 100% in stocks, then if there was a recession you will likely lose at least 30% of your money invested, or even up to 60%+ if it is a bad recession.

Risk tolerance will depend on you as a person – would you be able to stomach looking at your portfolio and seeing your money cut in half, in a worse case scenario? This is an extreme case, but important to think about before investing your hard-earned money.

This factor is also likely to be determined by the stage of life you are at. Are you single or married? Do you have kids, or people who are dependent on you? Do you have bills that you need to pay?

Time horizon

If you have a longer time frame to invest, then you should look into taking on more risk. This is because you will be able to recover from any recessions or downturns along the way. However, if you need the money within the next 5 years, then due to the volatility of the market, it would be better to put your money into a high-interest savings account.

Think about how long will you be investing for? If you are in your 20’s then you have decades of investing ahead of you, so you may be more willing to invest more into stocks. If you are planning to retire in a few years time, then you may want to invest more into bonds, or in safe dividend-paying stocks, so you are able to rely on this income.

Emotions

Emotional buying or selling is often the factor that causes investors to lose the most money.

This is because people have a tendency to buy when a stock is going up – because of ‘FOMO’ or ‘fear or missing out’, and sell when a stock is going down – because they panic and don’t like seeing losses.

It is hard to predict how you will react to seeing your money invested decreased. The best advice we can give is investing a small amount of money into the market. Due to the volatility of the market, it is likely at some point in the first few months you would have lost money – how does this make you feel?

Try to be objective when evaluating yourself as a person, and how that would carry over to your investments.

Goal

What is your goal? Or put another way – why are you investing?

The main objective of investing is to grow and compound wealth over time, but an actual goal or objective may help to motivate you more to stick to your plan.

Are you investing to help you retire early? Or to help one day pay for your children’s schooling? Or so you can buy a new car, or go on a holiday?

Investing: what can you do now?

If you have not yet invested in the stock market, then have a think about these factors and try to think about the type of investor you are, or would like to be. The more aware of these factors that you are, the more likely you will make the best investment decisions for yourself.

If you are already invested in the stock market, then be sure to evaluate your investments at least once a year. For example, if you are saving for a deposit for your house, do you really want to be 100% in stocks? As your wealth could decrease when the market does. If you are starting a family, do you still have the time to dedicate to single stock research, and track a portfolio of multiple stocks? So maybe consider investing passively.

These factors are often heavily interlinked. But if you are thinking about these factors then you are already ahead of 99% of investors out there, who buy/sell on impulse and don’t evaluate their strategy!

These are the most important factors to consider whilst investing.

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