What to Consider Before Investing

The investing process from asset research to investment-related decision-making is both intellectually stimulating and financially rewarding. No matter your personal opinions on investing, there’s really no question that compounding your money in an investment portfolio is an essential step towards establishing long-term wealth and financial security.  

To help kick-start your journey into the world of investing, we’ve put together five key questions for you to ask yourself. Once you answer these, we hope that you’ll have a better idea of what to expect and what to consider before investing.  

Question 1: Do You Have an Emergency Fund?

If you feel the same way we do about investing, then you’re probably chomping at the bit to get your money in the market. Before you can get started, however, you need to check whether or not you have an emergency fund.

As the name suggests, an emergency fund is a readily accessible source of funds that you can use as a safety net during emergencies, be it losing your job, falling victim to a debilitating illness, or suffering major damage to your home. Although there’s no hard rule for how much money you should allocate to an emergency fund, the most sound recommendation is to have enough cash to cover at least three months of regular expenses. 

If you don’t have an emergency fund, we highly recommend that you set one up prior to investing. Without it, any event that increases your expenses or modifies your income may force you to liquidate some or all of your investment portfolio. In this scenario, the best case is that you slightly reduce your portfolio’s gains. In the worst case, you’ll have no option but to withdraw your investment at a loss. 

After you’ve established an emergency fund, you’ll be far better equipped to accurately assess your financial situation, including your cash flow, net worth, and any variable liabilities. In turn, once you’ve got a firm grasp of your financial situation, you’ll be in a position to calculate how much money you can safely invest, both right now and on a recurring basis. 

Question 2: What is Your Investment Horizon?

The term “investment horizon” simply means the amount of time you plan on keeping your money invested in an asset or fund. Your investment horizon will have a major impact on your optimal asset allocation options. For example, if you’re targeting a shorter investment horizon, it would be wise to limit your portfolio’s exposure to the more volatile asset classes, such as equities or derivatives. This is because equity units and derivative instruments are more vulnerable to speculative bubbles and short-term market fluctuations. 

 If you just want to invest for the future and don’t have any long-term plans for exiting your investment positions, it can still be helpful to consider a specific investment horizon. With an investment horizon, you or your investment manager can make targeted adjustments to your portfolio in order to reduce your capital risk as you get closer to your cash out point.  

In most cases, the construction of your investment horizon will be heavily influenced by the following three factors:

    • Current income requirements: If you do not need money for several years, you can afford to keep your investment accumulating for the long-term.
    • Stage-specific income requirements: Your investment horizon can be structured to release funds when you anticipate a change in your financial requirements; for example, when you plan on having children, when you want to purchase a house, or when you are due to retire from the workforce.
    • Risk tolerance: If you have a higher threshold for capital risk, you might be more inclined to choose a shorter investment horizon.

Question 3: What Is Your Risk Tolerance?

Every investment decision involves an element of risk. If you’ve been researching what to consider before investing, you’ve probably noticed that the term “risk tolerance” comes up a lot. Put simply, risk tolerance is a metric for measuring your willingness to lose the money you invest. 

Risk tolerance is a very important factor in designing your portfolio’s asset allocation and asset diversification. For instance, if you have a high tolerance for risk, your portfolio will typically be built around an aggressive high-equity, limited fixed income strategy. Your determination of risk will also help you or your investment manager forecast initial projections for your portfolio’s rate of return.

Ideally, your risk tolerance assessment should be informed by a rational analysis of your age and investment horizon, your investing experience, your income and income stability, and your long-term financial goals. Unfortunately, risk tolerance is a psychological trait and it’s very possible to formulate inadvisably low or high risk tolerance measurements. To avoid this outcome, prospective investors may choose to employ a third-party investing expert to develop their risk tolerance assessment.   

To see what your risk tolerance is, you can take our Risk Tolerance Questionnaire

Question 4: What Are Your Investment Performance Objectives?

Investment performance objectives are a regular feature on any what to consider before investing list. Broadly speaking, the development of your investment strategy is a function of your investment horizon, your risk tolerance, and your investment performance objectives.  

To calculate whether your portfolio plan will meet your basic investment performance objectives, you’ll need an investment horizon and a rough idea of the return rate for the type of assets you intend to invest in. 

If you’re thinking of investing your money in an exchange traded fund, mutual fund, or retirement fund, you may find it valuable to compare your chosen fund’s historical returns against both index benchmarks and your personal investment performance objectives. Even though this can be a useful comparative tool, be sure to remember the age-old adage that past performance is not indicative of future results.   

Question 5: How Well Do You Understand Investing?

Investing is a complex and sometimes even intimidating subject. Just like any other skill, becoming a good investor takes a lot of research and practice. If you want to maximize your investment returns, make sure you get your research and due diligence done before, rather than after you start investing.      

If you’ve got money set aside for investment purposes but have no interest or time to learn about what to consider before investing, the best thing you can do is reach out to a well-respected investment manager or financial planner. Unfortunately, there are still a lot of unscrupulous or inexperienced fund managers out there, so make sure you do your research.

Of course, we wouldn’t be doing our job right if we didn’t recommend our own expert team at Capital Growth! If you’d like more detailed investment planning and portfolio advice, please get in touch with one of our expert financial advisors today. 

Risk Disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.

This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. The Standard & Poor’s 500 (S&P 500®) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are not available for direct investment. The performance of the index excludes any taxes, fees and expenses.

Registered principal offering securities and advisory services through Independent Financial Group LLC (IFG), a registered broker-dealer and investment adviser. Member FINRA & SIPC. Advisory Services through Capital Growth, Inc. (CGI). CGI and IFG are not affiliated.

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