One recent theme of TMWTFS has revolved around stock analysis and what an investor needs to consider and evaluate once they’re interested in taking action of their own finances and begin the process of investing on their own. I understand, having gone through the process myself, that there are a number of questions individuals have asked themselves or others as they question where to start this process. Here are a few good questions to start with and I encourage readers with any others to respond privately or publicly so I can address them in a follow-up post.
Is Do-It-Yourself investing for me?
It’s a difficult question to answer and like most it will depend on the individual situation, expectations and needs of the individual investor. Those who don’t have the time or desire to invest should seek professional advice, but there are a growing number of investors who want to take charge of their own financial future and have difficulty knowing where to start.
When friends ask about investing on their own I frequently get questions about strategies, specific stocks, ideas, companies in the news or about a single mutual fund/fund company. An investing strategy needs to fit your needs and capabilities and should never seem overwhelming, complex in practice or confusing when you start out.
When investing I make a priority to identify the importance of taking more control of my finances and understanding the important aspects of my intended investing approach. Money isn’t everything, but it can sure make life a lot easier if you let money and debt work for you instead of against you. Individuals often struggle to save because they spend more than they make or don’t structure their debt and investments in a way to maximize the most benefit.
Do I have the Confidence?
Investing is a progression and confidence is never automatic; it takes time. There’s no trick or simple “Get Rich” approach that will make you money overnight. You can learn an abundance of information from books or academic literature, but I’ve learnt more about investing from just a few mentors and direct experience than I ever did in any business or finance class during university. Those classes built a foundation for examining the numbers of a business, but the qualitative tools that I learnt to apply to my investing activities often rely on common sense. There’s no replacement for common sense and rational decisions in any investing approach.
Do I have the time?
Successful investing is not something that can be done overnight or in the blink of an eye despite the attempts of many authors and “supposed” experts attempting to convince the public. Promises of instant wealth will be irrational and time is likely your best opportunity to create meaningful wealth. There will always be successful individuals who roll the dice and come out lucky, but the majority of us who give it a try are just as likely to fail 9 out of 10 times. Eventually the market catches up with investors who take on too much risk and the market resets the delicate balance that exists between risk & reward.
Do I know the risks?
Investing should never be a gamble and in my own activities I attempt to have every action planned, considered, evaluated and then calculated more than once before I ever make a purchase. An old carpentry phrase of “Measure Twice, Cut Once” is something I often apply to a situation where I know more patience is needed.
Do I have the knowledge?
While most investors hate paying fees they are inherently part of the process. Whether it’s a MER, commission, taxes or other if you don’t have the knowledge to investor initially by all means seeks professional help through an accredited advisor or professional. You will pay more due to fees over the short-term, but you’ll likely be diversified against risk and have a relationship with a professional as you begin your education. Managed products are at times a better solution than investing blindly into a strategy you don’t completely understand how to conduct in an effective manner.
Do I have a strategy?
Strategy is something many investors talk about at length, but rarely can define in any concrete method. It’s easy to simple start investing, but can you put your strategy on paper? Can you define it or explain it? Is it complex or simple, easy to duplicate or difficult? Has it been successful in the past and for what reasons? What made it successful and is the investing environment the same to accomplish those objectives? Is it fundamentally sound or permanently flawed?
Can I commit to a strategy?
When I talk about discipline this is what I directly mean or allude to. You need to not only talk the talk, but walk the walk and see something through if you believe it to be the best fundamentally sound process for investing for your situation. Far too many new investors switch strategies multiple times that lead to inevitable short-term failures instead of allowing time and compound interest to work in their favour. Micromanaging a portfolio is likely detrimental to long-term returns and commitment, as in life, has many long-term benefits.
Can I anticipate my reaction to the market?
Twelve months ago could you have imagined the market volatility, significant equity losses and bankruptcies of the past year? If your portfolio had suffered double digit losses how would you react? If the market goes down 10% in a single day what will you do: buy, sell or hold? Can you handle the upside of the market as well as the downside? Will you be greedy, fearful or rational in your decisions? Those are all questions you can’t truthfully answer until you place your own money at risk with your decisions. A good rule to follow is that what you initially determine to be your risk tolerance will inevitably be half during extreme market turmoil.
Am I comfortable with my abilities?
Confidence is a wonderful trait, but arrogance can kill your portfolio. One key for any individual investor as they begin to invest on their own is to stay grounded and stick to doing what you do best. There’s nothing wrong with learning as you go, but you have to have a basic understanding of what you’re investing in to protect yourself reasonably from unforeseen risks. If you know honestly that you aren’t prepared to invest in a certain asset class or investing strategy than you owe it to yourself to wait until you feel you’re properly prepared. When you finally decide to begin you may still have some anxieties but you’ll know that you have the tools needed for success.
How will I evaluate my performance?
This might seem like a redundant question to ask yourself, but it really makes a difference on how an investor measures results and expectations. You can choose to evaluate your performance on absolute returns, an increase in tax-efficient cashflow or risk-adjusted versus other assets but the importance is to match how you’ve performed with some tangible measure that makes sense to you.
Another great resource you can use to answer these questions and more is the New Investor Index located along the top of this site.