If you’re considering investing in the stock market, it may be tempting to jump straight in to make your first trade. But it is always important to prepare before starting something new and so there may be benefits to pausing and asking a few key questions before you act.
1. What is my investment goal?
Have an answer for why you are investing and the goal you want to achieve. For some it could be to help grow a deposit to get into the property market, for others it could be to improve the quality of lifestyle they will have in retirement.
Be clear about your goals and write them down.
2. How long do I plan to invest?
Someone investing to get into the property market shouldn’t take the same level of risk as someone aged in their 30s investing for their retirement.
Generally speaking, the shorter the investment horizon the less risk you should be taking.
3. What is my investment experience?
Many people wouldn’t entertain the concept of building a house for themselves, but see benefit trading in shares of businesses they know very little about. This is despite investment management being a highly lucrative industry with professional analysts who live and breathe the industry sectors they cover.
Take a moment to work out what is inside your circle of competence and what isn’t. Without clear rules for how you will invest you may be tempted to veer into investment options in which you have little experience.
4. How much time can I dedicate to managing my investments?
It’s worth considering the amount of time you can dedicate towards your investments as this may determine your investment style; e.g. individual stock picking or investing through exchange-traded funds (ETFs) and index funds (see below).
If you don’t think you can dedicate much time to researching your options and reviewing your portfolio from time to time then it may make sense to get a level of help, including using robo advisors like Six Park that provide automated, algorithm-driven financial planning services with a layer of human supervision.
5. Will I be ‘active’ or ‘passive’ in my investing approach?
Individual stock picking is one way to invest. This is an active style of investing and differs from investing in index funds and ETFs, which is more passive.
Both strategies have an important role to play, but generally speaking an active style of investing relies on assessing the quality of the business, the management team and the valuation of the share price. Passive investing has less of a company specific view and more of a broader view of the index.
6. What emotions am I feeling right now?
Many people think that investing and finance is simply making decisions on financial numbers. However, it’s far more than that. The psychological and emotional side of investing is equally, if not more important. Often we can be our own worst enemies – many people start investing because a neighbour or friend told them about a stock that helped them make a lot of money, which makes people experience FOMO. Emotions like this are so powerful that they can lead you to take on unnecessary risk.
7. Will my investments pass the sleep test?
Basically, the question here is whether you are comfortable in your investment strategy.
Zoom out over decades and you will see that stock markets traditionally go up over time. Zoom in and you will see the bumps along the journey. Most years experience a correction (a drop of 10%) and crashes of 20% or more occur from time to time too. It’s hard, if not impossible to consistently time the market to be invested but avoid significant down periods. But, for instance, if you think a crash of 30% of more could lead you to selling out of your investments then it’s likely your investment strategy won’t pass the sleep test and you’re taking on too much risk.
8. How much is recent past performance motivating me?
Past performance is not an indication of future performance. By all means take recent returns into account, but they shouldn’t be the sole reason you are investing.
9. Will my investment portfolio be suitably diversified?
You can diversify your portfolio through sectors (e.g tech, healthcare, retail etc) and geographically (US, emerging markets etc). Despite this many Australians have a large ‘home country bias’ in their portfolios and a lot of our larger “blue chip” companies are either banks or mining companies. Consider if your investment portfolio is going to be suitably diversified.
10. Do I need some help?
There are educational books and podcasts that can provide you with more information about investing. There are professionals that can help, and through advancements in technology, there are now also robo advisors like Six Park that provide affordable financial services if you need help with investing in a low cost, time-saving manner.
Achieve your investment goals
Investing in a diversified investment portfolio can be one of the best financial decisions you can make. If planned and executed well, it can help you achieve your investment goals with lower fees and less stress.
Here are Six Park, we can help you make that happen. Get started now by taking our free assessment.