What is the first thing that comes to mind when we talk about “Investing”?
I believe to most it simply means money making money! Doesn’t that sounds exciting and attractive.
However, it is time for the reality check, not all investments make money. In fact, many investments lose money.
So, it is quite amazing that since investments lose most of the time, shouldn’t the first thing that comes to mind when mentioning “investing” be losing money.
That is why, the first step before even considering investing is to determine how willing you are to accept loses and still sleep well at night. No point to start investing only to find yourself affecting your physical and mental health when the investment takes a turn for the worse. You will be better off placing your investment in a fixed deposit and look for other more suitable ways to generate wealth.
The next step is the amount you can afford to lose. Set aside an emergency fund for a rainy day, the rule of thumb is about 6 months of your income, this amount must be kept in a liquid asset like cash, do not invest it in illiquid assets like property.
For the remainder you wish to use to invest, determine the amount you intend to lose the use of it for a period suitable of that investment asset. For example, if you have any intention to use it for short term goals (within 3 years) like purchasing a car or your wedding, do not go into stocks/shares and risk having to liquidate at a loss during a bear market when you urgently need the funds.
Instead of the common advice of risk / reward, think more holistically of risk / loss / reward. For example, if you invest $10, it is often advertised only the good side, a probability of 50% to make $5 profit. However, the picture is not complete. You also need to consider the risk of 50% chance to lose $10! Would you still take this investment? Definitely NO! Even the casino gives better odds than this. This is similar to the deal those who invested in the lehman related minibonds got.
To summarize, think of all your potential losses before jumping on the investment bandwagon.
- Loss of sleep due to losses
- Loss of use in an emergency
- Loss of other opportunities it could be used for
- Loss vs Reward vs Risk
This may be a “wet blanket” article, but it is better to be prepared than to learn it the hard way after you started investing. Focusing on losses and practicing proper money managing techniques like stop losses and good exit strategies, the winnings will subsequently follow.
Happy investing by analyzing the potential losses first. 😉