How to Prepare for Investment – Things to Check Before Investing
Today, we are discussing about how to prepare for investment and things to check before investing. It is a good collection of important points especially those are entering directly to the stock market with an intention to investing in stocks and make money.
This session will help you to do a self assessment to understand whether you are ready to invest in stocks. Also, these points give an idea on things to do before actual investments starts. Read carefully and ask questions in the below comments section and if you have any… Let us start with an introduction…
Introduction
Irrespective of geographic, lots of people especially young people, entering to the stock market to invest and make money. Unfortunately 99% of these new comers are not even have the basic ideas on how to invest in stocks successfully.
Also, most of them are still thinking that investing means only stock market investing. It is a big fault or mistakes. Such thoughts coming from lack of knowledge and information on what is investments.
In order to avoid such deadly mistake, investors should check their investment readiness and assess the same against them. Hereunder, few major points that new investors can use for a self evaluation.
1. Budgeting
How many of you are aware that the personal finance is directly connected to investing? Most of the people not aware. Yes that is the truth. Personal finance is a big tree and investment is just a branch in that tree. So it is mandatory to understand the major points in personal finance before start investing.
Budgeting gives an idea about the inflow and out flow of the money and the real savings in our hands afterwards. In other word, it gave right control over our money to our hand. There would be savings/surplus after the expenditures and that can be used for various activities such as investing, paying EMI etc… etc…
2. Get Rid of Debt
It is important to pay off all your debts especially, high interest debts before start investing. The reason behind this is, if you have not cleared your debt/s first, later the profit from your investments would go to pay-off the debts. If so, what is the use of investing?
So clear the debt first and that is very important.
3. Investment Goals and Timeline
One of the core point I am always informing to the readers that, investment goals and time line for each goals are mandatory. Goals can be anything such as constructing a house, buying a car, higher study of children, marriage, holidays etc. Each goal should have a decent time line or time frame to achieve. These time lines can be 5 or 10 or 15 or 20 years and so on..
The importance of having the time frame is mandatory to create an investment portfolio by adding the right investment products to achieve the particular goal. For example, if you need to construct a house after few years and adding few money to bank as fixed deposit, how you are going to achieve that goa? because returns from fixed deposits are less and limited. Here is the importance to setting time frame for each goal to create right investment portfolio by selecting and investing to the right investment instruments that later work better for you.
4. Having an Emergency Fund
It is mandatory for any investors having an emergency fund in hand. Life is filled with uncertainties such as job loss, business failure, income loss etc.. To recover from such, creating an emergency fund is important.
Emergency fund can be created by saving money to a particular account and it should be at least sufficient for you to survive at least 6 months without any income, If not have an emergency fund, you may later forced to stop your investments for money to survive.
5. Protect Self and Family
Next point is protection. This is applicable to all in the family including the breadwinner of the family. Protection can be done through right insurance policies. In my opinion, bread winner of the family should protect self with insurance policies like term insurance. The ratio is the insured amount equal to 10 years of annual income, at least.
Health insurance is another important point to this group. All the members in the family should cover with health insurance by considering current situation. Lots of diseases, accidents, lifestyle related issues etc.. is costly for families. If not protect the families properly with right insurance/s, investment may need to stop later to find money for the expenses.
6. Risk Assessment
Identifying the risk tolerance or risk taking capacity is the most import part of self assessment. It is because, based on the risk tolerance only the portfolio creation would happen with right investments related to its risk. For example, a person in the age of 25 can take risk much more higher than a person aged 55.
People with high risk tolerance can select risky products such as stocks, various mutual funds etc.. to create and investment portfolio for them. Those with less risk tolerance have to select the products that would give certain extend of capital protection. Identifying your risk tolerance is thus very important.
7. Asset Allocation
Asset allocation is closely connected to the risk taking capacity, goals and time frame of the investment. Depends on the same, one can easily identify what investments instruments and in what proportion to be added to the portfolio to create a perfect portfolio with right products.
8. Invest Early and Regularly
Investment should start at the earliest to get maximum benefits. It is recommended to start investments regularly from the day of getting the first salary. It help to get maximum benefits from the compounding power of stocks, mutual funds and another similar products to a great extend.
9. Have an Investment Strategy or Framework
Any investor who entering to the investment world should have their own personal investment strategy or framework to evaluate the product, select, buy and sell in the right time. This framework is specifically fantastic for those are investing directly to the stocks and mutual funds that have high risks.
A framework or strategy can be created by reading and getting knowledge properly. You can make use of the best books like “Common Stocks and Uncommon Profits” from Philip Fisher, books and writings and even famous quotes from world famous investors like Warren Buffet, Benjamin Graham, Peter Lynch etc.. This would help you to get idea on their investment styles and the methods they have used to invest successfully.
Here you can find my investment framework as an example.
10. Read, Read, Read ……
You must acquire enough knowledge before start investing. At least 30 minutes in everyday you should spend to read good books, articles, watch good videos etc… this would add more knowledge to you on how to do right investment
Conclusion
Above ten points are actually an exercise that you can do against your current status to evaluate the investment readiness. If any failed, then take the necessary measurements to rectify the same. Stock market is a vast world with lots of good and bad and that to be identified properly and promptly before start investing. Assessing your readiness would help you to understand whether you are able to meet those or not.
Let me know if you have any questions or queries.