Taking the first step into investing is not easy. After all, it is probably one of the biggest (and potentially the most rewarding) financial journeys that we will embark on in our lives.
It’s normal to be nervous. I was too.
Here’s a simple checklist, to give you some assurance that you are ready, or perhaps signal to you that you need more preparation before you get your feet wet.
Check 1: Do You Have Your Emergency Fund Settled?
If you’ve read the Money Management Framework, you’ll know that an emergency fund is one of the first key financial decisions one should make.
An emergency fund is a stash of money that helps you through financial difficulties. This can include retrenchment, medical procedures, hospitalisation, property damage etc. The amount will vary from person to person, but generally, it is advocated to have 3-6 months of expenses saved up as your emergency fund.
This gives you the holding power when you invest. Holding power means that you do not need to withdraw your investments to pay off your emergencies or your expenses when times get tough. This prevents you from having to realise unnecessary loss when the market is falling.
Take the recent market crash in March for example, the popular S&P 500 ETF, SPY, fell all the way from around USD 336 to USD 218 per share. If you had lost your job, but had no emergency fund to tide you through, you would’ve had to sell at a 35.12% loss, only to see SPY rise back up to a new high!
Check 2: Have You Cleared Your High-Interest Rate Debt?
Just like preparing your emergency fund, this is also a step out of the Money Management Framework.
Paying down high interest debt is important because high interest repayments will eat into your returns. Say you have a $10,000 credit card debt, charging you 10% per annum (which is already considered low by credit card standards), assuming no compounding, you’re losing $1,000 per year to interest payments if you don’t clear your debt and choose to invest your money instead.
However, if you clear this debt with whatever money you’ve saved up, in a sense, you’re making a guaranteed 10% return on your money. This is because in the alternative case, you would have lost 10% to interest payments on your debt. So by paying off your debt, you’re “making returns” by averting losses.
Check 3: Do you need the money you’re investing in the near future?
To succeed in investing, generally we should target a longer time frame. As such, we should not be investing money that we cannot keep in our investments over a long period of time.
For example, money that you would need for a down payment or a wedding, should not be used to invest. These are payments that you will be making in the near future, and by putting it in markets, your initial capital may be lost.
As such, if you are saving up for a big purchase in the near future, it is best to keep them in low risk investments such as your savings account or in a fixed deposit. They may not bring fancy returns like the stock market, but they will preserve your capital.
Check 4: Know why you invest
This is a piece of advice I give to my friends when they first start investing. Only when you know why you invest, can you properly decide what kind of strategy would best suit your needs.
Trying to daytrade using an index investing strategy, is likely to end up futile because index investing often advocates a long timeframe for increased chance of success whereas day trading focuses on much shorter time frames in the minutes or hours.
As such, before you invest, I would suggest you ask yourself why you want to invest, Write it down if you need to.
Are you trying to prepare for retirement?
Are you trying to make a side income?
Or are you trying to just make a quick buck just for the thrill of it?
There are no right or wrong answers, but the reason you invest will affect the strategy you take and subsequently, choosing the right or wrong strategy for your needs will impact the results of your actions.
Moreover, having goals will also help you know how much you need to invest to get there. If you want to accumulate a certain amount of money to FIRE, you need to know how much you need to invest regularly, in order to arrive at your targeted FIRE number by your desired retirement age. This will certainly help you stay on track to achieve your goal.
Check 5: Understand what you’re investing in
I’m gonna be blunt here, but if you don’t understand what you’re investing in, you’re just a speculator, or as I sometimes like to say, a gambler.
Ever hear one of your friends come up to you and tell you things like, “Wah, the other day I bought some Tesla shares, today up 20% already leh!”
In strong bull markets, such comments are not uncommon. But oftentimes, the people who make such comments don’t know much about the stock they’re buying into. They’re buying into speculation that the price would rise. I know, because I was there once.
When Tesla started its meteoric rise at the start of 2020, I was enthralled. I was looking at gains I never knew was possible. Every night, I would watch the price rise by another $40-$50. This was when Tesla was trading at around $400-$600 (pre-stock split). I knew I had to get a piece of it. And I bought 3 shares of Tesla just to try my luck. I held for 3 days and made it out with a tidy profit (~10%).
I was lucky this time. But there are times that I wasn’t. In 2020 as well, I stumbled across a post on Reddit about this pharmaceutical company, Agile Therapeutics, who were supposedly expected to receive FDA approval for a contraceptive drug for women. Expecting the price to shoot up, I bought a small amount to try my luck. Sadly for me, despite the approval, the share price collapsed and I eventually sold a month later netting an almost 40% loss.
I do think though, that it taught me a valuable lesson. It taught me that, if you don’t know what you’re investing in, you can’t make money consistently, because you can’t be lucky all the time.
You can win once, twice and even thrice. But it can take one bad stock to wipe you out.
If you’re picking individual stocks, ensure that you do sufficient research into the companies that you’re picking. Know what are the opportunities and the risks for the companies and know when to exit from your investment.
Even if you’re picking index ETFs, there are good choices and choices that aren’t as good. It is important to understand the index that your ETF tracks, the expense ratio and the backing company which provides the ETF among other characteristics.
Check 6: Understand that the market is not always rational in the short-term
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Lastly, when entering the stock market, no matter what strategy you choose, it is important to know that volatility is to be expected in the market. There are days when the market will rise or drop for seemingly no reason at all.
And that’s okay. What’s important is to know that if your companies are fundamentally sound, and there are no changes in the fundamentals, there is no need to be afraid.
Emotional investors sell at a loss, good investors sit tight and hold through.
If you understand this, you’ll be in a much better position to manage your emotions as you watch your investments move up and down with the markets.
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