3 Non-negotiable questions to answer before you start to invest
Shh…most financial advisors don’t ask you these. If you’re a fresh grad or a busy employee who’s been ignoring investment opportunities to grow your wealth or someone lost on what assets to start investing in, where to start, or how to go about it then keep on reading!
There are plenty of investment vehicles out there to grow your wealth. But, which ones do you choose? Do you seek advice from a financial advisor? or walk into a bank and ask a bank executive only to be introduced to their latest product that needs to be sold? or ask your friends and family for hot tips? or do you google it and still ended up being confused with information overload? or are you constantly attending “free” and paid seminars only to be disappointed that you can’t keep up or realised that their strategies couldn’t fulfill your expectations? (Yeap! That’s what I did 😂) So to clear things up, here are the 3 questions you will need to answer first before you make any decision to put your money to work!
#1: What is it for? How much do I need and by when?
This question intends to understand your investment’s targeted amount, the timeframe you’ve given yourself to accomplish it, and the purpose behind it. It’s crucial that you ask yourself FIRST, the purpose of your investments. Most people don’t do that. Some would give themselves vague answers like “to increase my wealth”. Without clarity, you’re likely to fall into the trap of being confused or unsure in the later questions to come. Why? Because if you were to ask yourself “how much do I need and by when?” then the next question you would probably ask yourself is “how do I know how much is enough?”. Right?
For example, if your purpose of investing is to have a dream wedding in 3 years’ time, then you can start to do some research on the cost of your dream wedding. Find a number, and that would be your budget and target you need to hit. If you’re considering retirement as your purpose of investing, you can easily find a retirement calculator online to find out how much you need. Here’s one I’ve found. If your purpose is to have a higher standard of living for you and your family, find out how much increase in the percentage of living expenses you want. State a number to it. Remember to find your time frame as well. Find a date for it. An easy exercise would be to complete the below sentence.
My financial goal is to have (state your targeted goal in $) for (state your purpose) in (state your time frame) or by (state the date).
#2: How much ROI, effort, starting capital and time commitment do I need?
With a clear target and goal in mind, you would be able to have a rough estimation of how much ROI and savings rate is needed to hit your goals. However, with only a goal and purpose in mind is not enough to get you there — consistency is. So the more crucial question to ask yourself is how much time do you have and the time commitment you are willing to give to manage and grow your investments? Is it once a month? Once a week? Daily? Once every quarter? How long will it take? An hour? Two hours? Remember to take into account the time you are willing to set aside to learn how to grow your investments as well. Or is it a set it once and forget it? (i.e. standing order). This determines what asset class should you venture into.
Is it property investments? Stocks? Crypto? Bond? Commodity? Starting a service business? Dropshipping? It’s important to understand that different asset class is able to produce different maximum ROI such as property investment, bond, and commodity as they are meant to be stable asset classes. On the other hand, stocks and crypto would have a much higher ROI due to their asset nature to beat inflation, and businesses don’t operate based on the prices of these asset classes. Due to the nature of high scalability, online service business and dropshipping have the highest ROI but the effort and time commitment it takes to initially scale it is much higher. The starting capital to invest in a property and time commitment to manage it are significantly higher than the rest of the asset class as well.
I’d suggest asking around individuals who are currently invested in the asset class you’re interested in and find out the maximum ROI they’ve gained, the effort it took, starting capital needed to get started, and the time commitment they took to achieve where they are now. (Currently on it and will share it later on!) Well I know, you’re probably thinking “I want the highest ROI with the least effort and time commitment!”. 🤨 Who wouldn’t? So the next question is crucial to find out if it’s right for you.
#3: What are my investment principles and risk tolerance?
This question aims to find investments that are aligned with your character — hence, risk. It describes what do you strongly stand for. Do you believe that time in the market is better than timing the market? For example, a day trader could entice you with high ROI and low commitment but if you believe that time in the market is better than timing the market, and you strongly believe in dollar-cost averaging then the very likelihood of you trading would be very minimal. So, it doesn’t mean that if an investment vehicle works for someone, it will work for you. Find out the other party’s investment principles and see if it does match yours. Investing principles such as dollar-cost averaging vs placing a stop loss, diversified vs concentrated portfolio, dividend investing vs growth investing, investing using leverage vs using cash and etc are ways to show your risk tolerance.
So far, answering these 3 questions has helped me gain greater clarity in what I want, why I want it, and how to get it. If you’re new, and curious as to what my goals are, it’s to have $100k for achieving lean FIRE in 2 years or by December 2023😄! With an average savings rate of 80% and an approximate 20% annual return from a combination of stocks, options, and crypto that are aligned to my investment principles, I am confident that I would be able to achieve my goal within two years (Note: I laid out my plan using an excel template with a 4-year time frame). So, I would recommend answering these 3 questions before deciding your financial game plan.
If you’ve found my sharings to be helpful or insightful, do subscribe to my email newsletter here to know what my financial gameplan is and my progress towards achieving my goals.