Question to ask yourself before you start Investing

Rules to follow before you start investing

Where can I invest my P20,000?

This is a question I often see in business and investing forums everywhere, although of course, the amount varies.

After the first post, I’d often read invites from other forum members to join him or her in various affiliate programs and multi-level marketing companies.

At other times, the answers would be business ideas which are currently doing good and sometimes, the replies are vague references to mutual funds, unit investment trust funds (UITFs), forex trading, e-gold and the stock market.

After a couple of weeks, the thread starter stops posting and the discussion ends without feedback regarding where the money was finally invested.

Whenever this happens, I’d imagine a simple employee who received a salary bonus or an unexpected windfall and was too lazy to do personal research on investment opportunities. That’s why he decides to ask online forums where he can invest.

A few days after, he’d experience information overload and succumb to laziness. Finally, he’d decide to just buy a new cellphone, a new car or whatever luxury he can afford.

Is the story familiar to you? Has this already happened to you or someone you know?

The next time you find yourself with some extra cash that you may want to invest, I suggest you follow these simple tips. It’s my personal step-by-step guide to investing in anything and everything.

Ask yourself these questions and not only discover the right investment for your money but more importantly, help increase your financial literacy.

Step 1: Do you already have an emergency fund?

Before you start investing your money, you have to first assess your current financial situation. Track and anticipate your expenses and save up for an emergency fund. Three to six months worth of your monthly expenses is recommended.

Once you have an emergency fund, you become more confident in taking investment risks.

Step 2: Why do you want to invest?

The main reason you want to invest is to make your money grow. Unfortunately, this reason is not enough. You should have more specific objectives. Are you saving up for retirement? Do you simply want extra income?

Knowing how you are planning to use the profits from your investments helps in determining the best investment product for you.

For example, if you want to prepare for the college education of your children, instead of investing in a business franchise, you may consider getting an education insurance instead.

If you’re simply preparing for a special occasion such as your wedding next year or a vacation out of the country in four months, then it’s wiser to put your money in short-term, low-risk investments such as treasury bills.

If you have several objectives, list them down and assign their importance to you.

Step 3: How much money are you planning to invest?

Determine your investing budget. Knowing exactly how much money you have provides a better perspective on the investment opportunities you can afford.Furthermore, decide if you will be rolling over your returns into the investment. This means that whatever income you receive, will it be reinvested back into that investment? If so, then consider putting your money in assets that easily compound as the principal value of the investment increases.

Lastly, remember to put out as much as you can afford, specially if you’re going into high risk investing such as currency trading. And more importantly, stay within that limit.

Step 4: How long is your holding period and how much risk can you take?

Investments take time before they return income. Furthermore, different assets increase and decrease in value at different rates. This is the reason why I asked for your primary objectives in step 2. Knowing your personal goals helps in determining the length of time and the level of risk you can take in your investments.

Keep in mind that long-term investments generally give low to moderate returns for less risk, while you have greater chances of losing your money in short-term investments with high yield. If you opt to invest conservatively, be sure that the modest rate of return you’ll receive is acceptable to you.

More importantly, determine if the profits will be high enough to cover for inflation. Finally, whatever length of time and level of risk you decide to take, be certain that under the worst case scenario, your financial stability will not be affected.

This is the end of the first part, click the link below to read the last part of this article.

Step 5: How much time can you commit to your investment?

This is a common misconception among beginners, they think that after investing their money, they could just sit back, relax and wait for the money to grow. Investments, in general, do not immediately translate to passive income. Your active participation is required for it to become stable and profitable.

Therefore, you should determine how much of your time you can devote to studying and monitoring your investments. Remember that businesses experience lean and peak seasons and the money market fluctuates, if you are out of the loop when these things happen, chances are you won’t see your money back. Keep this in mind when you finally choose your investment.

Step 6: Is everything clear now why you’re investing?

After fulfilling the requirements that was asked in the previous steps, it’s now time to develop your personal investing mission statement. Write it down and read it before you make investment decisions. This helps you focus on your objectives and avoid being sidetracked into less optimum investments. Below are sample statements that could guide you:

I have P20,000 just sitting in my savings account which I want to invest for some extra income. I’m planning to use this money next year to pay for my vacation trip abroad so I’m only willing to invest in short-term, low-risk investments. I’m busy at work so I can commit only a few minutes a day to track my investments.

I want to finally quit my job so I need an investment that will help me accomplish that. I currently have P50,000 which I’m willing to invest in long-term and medium-risk investments. I’m hoping to leave the corporate world within two years, so I need my investment to give returns that can cover my expenses by that time. I’m willing to commit at least two hours everyday to study and monitor my investments.

It’s best that you write a draft of your mission statement and revise it for the next few days as you reevaluate and rethink your objectives and investment criteria.

Step 7: Is there an investment that can help you fulfill your mission?

We now come to the most important part of your journey to investing. Finally choosing the right investment instrument for you. By now, you probably have some candidates in mind but to give you more options, here’s a few more you can consider:

Low Risk Investments: Bonds, Cash Deposits, Insurance, Mutual Funds, Treasury Bills
Medium Risk Investments: Business Ventures, Multi-level Marketing, Mutual Funds, Real Estate, Stocks
High Risk Investments: Business Ventures, Forex, Real Estate, Stocks

Why do some of the items repeat? Because the risk level of an investment can depend on its nature and your holding period. For example, doing short-term, speculative investing in the stock market is high risk but making a long-term investment in blue-chip stocks will give you low to moderate levels of risk. Do take note that the simplified enumeration above is incomplete. There are subtypes and alternative investments that exist which I encourage you to discover and learn.

Do your homework and find out everything about your chosen investment. If you can find an expert to guide you, the better. Remember that the less you know about an investment, the higher the risk of you losing money. Furthermore, the more control and power you have over it, the lower is the likely risk.

Step 8: Should you diversify your portfolio?

Most people would advise you to do so because spreading your investments in products with various levels of risks will hedge against losses. But if it’s your first time to invest, I advise you to choose just one and have fun with that first. You can always invest more when you are more adept about investing. Lastly, I advise you to do your transactions only with reputable investment firms and financial institutions. Be wary of fake brokers, fly-by-night firms and investment scams.

One last reminder before you start investing:

If you find yourself short of capital to invest in your preferred product, or you can’t find an investment that can fulfill your mission, then perhaps you should consider investing in knowledge. Put your money in books, training seminars and programs that will help you increase your financial literacy. This is a low-risk, high-profit investment you can immediately do today.

Question to ask before purchasing Stock& Mutual Funds & to your adviser

Questions on stocks

Is this really as good a company to invest in?
How will this stock make me money? Dividends, capital gains?
Can I lose my capital permanently in this stock?
How long has the company been in business?
Is its management ethical and experienced? Has the management been successful in the past?
Has the company ever made money for investors before?
How is the company doing compared to their competitors?
Where can I get more information about this stock?

Questions on mutual funds…

Does this mutual fund match my investment goals?
Why is this scheme suitable for me?
How will this investment make money? Dividends, interest, capital gains?
How easy would it be to sell this scheme if I needed my money right away?
What are the specific risks associated with this investment? What is the maximum I could lose?
How experienced is the fund manager? For how long has he managed this specific scheme?
How has this fund performed over the long run? Where can I get an independent evaluation of this fund?
What specific risks are associated with this fund?
What type of securities does the fund hold? How often does the portfolio change?
Does this mutual fund invest in any type of securities that could cause the value to go up or down rapidly in a short period of time? (Like, derivatives?)
How does the fund perform compared to other funds of the same type or to an index of the same type of investment?

Like these questions to the financial adviser

What’s your interest in recommending this investment to me?
Have you ever been disciplined by the stock market regulator SEBI?
How long have you been in this business?
What training and experience do you have?
What other firms have you been registered with?
Have you personally bough this investment in your personal account?
What is your investment philosophy?
Describe your typical client. Can you provide me with some names and telephone numbers of your long term clients?
How do you get paid? By commission? Amount of assets you manage? Some other method?
Do you make more if I buy this stock (or bond, or mutual fund) rather than another? If you weren’t making extra money, would your recommendation be the same?
Are you participating in a sales contest? Is this purchase really in my best interest, or are you trying to win a prize?