≡ Menu

Building an Investment Portfolio I:

Evaluation of Personal Situation

One of the most important rules in investing is to understand yourself. As I’ve outlined before: no one can ever manage your money like you can. Why is this? Because no one else lives your life, runs your household or has your best intentions at heart other than you. Understanding yourself is a simple practice to learn, yet many people fail to recognize the key elements or components prior to investing on their own or with a professional. This is an area where emotions run rampant and people fail to succeed simply by not understanding their own behaviour before purchasing an investment.

The first step is to list all relevant personal details about yourself: Are you single, married, have children, future expectations for a family? Do you own a house, rent, how soon would you like to rent or own? How old are you, how far away from retirement are you, what would you like your retirement to be like? Do you work, how many hours per week, is this your career, would you like to switch careers? Are you good with money, bad, can you budget, can you save, do you currently budget? What are your spending activities, are you living within your financial means? Do you let money work for you, do you know what that means?

All of those questions will start to give you a very clear idea of what level of understanding I’m describing. Once you understand your strengths, weaknesses, opportunities or limitations of the situation then you will have a much easier time with the rest of this process. In strategic management we call this a SWOT analysis, but it can be very simply applied to anyone’s personal situation for investing purposes. The specific numbers aren’t as important as the understanding behind all this. Write everything down on a piece of paper with any other important information you can think of and mark that sheet as “qualitative.”

Next is the “quantitative” assessment. This involves writing down the meat & potatoes of your finances. First is your monthly budget. Even if you’re not a penny-pusher or consider yourself “cheap” you’ll want this as a basic assessment of how you’re doing with your finances. You can pull budget guides off websites or make a simple list of everything you’ve spent money on in the past 6 months. Include gifts, vacations or a generalized amount that you might spend aside from the “necessities” of life.

The purpose of all this is to get a very clear picture of how much money you are spending vs. how much you earn. Realize that being a good saver is not simply spending less money than you make. You also want a clear picture of your debt load: if you can’t stay ahead of payments on your mortgage, credit cards or other debts then your financial health may be in question and you should seek professional help. Also list your current savings, investments or assets and get a general idea of how much you can or want designate for investing. This might include a large one-time lump sum, a few hundred dollars a month or simply investing whenever funds are available.

See Also:
Building an Investment Portfolio:
Part II
Part III
Part IV

Subscribe to The Stock Analysis Mailing List

Email Format

{ 0 comments… add one }

Leave a Comment