How to Make A Better Investment Decision?
Updated: Oct 28, 2021
Just because you have the right amount of money to start investing, doesn’t mean you’re a hundred percent ready for it. Here are ten basic investing questions I prepared for you. I highly encourage you to ask yourself these questions before making an investment decision.
What is the Importance of Investment Decision?
Financial gurus always taught us to invest in order to grow our money. Yet, on the contrary, most people are only losing money for the following reasons:
Don’t know the available investment options
Invest without having an emergency fund
Invest without adequate research
Take more risk than warranted
Focus on the returns rather than the process
Easily swayed by get-rich-quick schemes
And many more…
I personally committed some of those mistakes too. But as I pursued my investing journey, I realized that having an investment decision is more than just growing money. Making an investment decision is critical to deliberately improving your financial life.
There are also a lot of factors to be considered when making an investment decision. As I said earlier, having enough money doesn’t necessarily mean you’re ready for it.
Factors to consider before making an investment decision
Risk vs Reward – A risk/reward ratio compares the expected returns to the amount of risk of a certain asset or investment.
Risk Appetite – What works for your friend may not be suitable for you. All of us have different risk tolerance. You can quantify your risk appetite by asking yourself, “How much losses can I handle?”
Investment Capital – Of course, you can’t invest the money you do not have. Some investment requires minimal capital (Mutual fund) while some do not (Real estate).
Time Horizon – How long are you willing to wait? There are some investments that are designed to mature in months (Time deposit) while others may require years (Stock market investing).
To help you arrive with better investment decisions, I prepared ten basic investing questions you should ask yourself. I suggest noting down your answers on a paper and reflect from it.
10 Questions to Ask to Make Better Investment Decisions
1. What are your personal financial goals?
A friend once asked me how to make more money. I asked her back, Why do you need more money?. I know the answers are pretty much obvious but I was just trying to flex out her deepest desires.
“Uhm, ahh, uhmm, because, ahmm… kuan, kanang...” That’s what she said, as far as I can remember.
Now, what if I was some sort of a genie, asked you the same question, and gave you exactly the first three words you told me? If you were my friend, I would have given you “Uhm, ahh, uhmm” perhaps.
So what are your financial and life goals, really? Why do you need so much money? To build a house of your own? To pamper yourself and your family? To help charitable institutions?
Whatever that is — that will serve as your compass. This is just the first step though but apparently is the most important one.
List them down and be clear and concise with those goals. Beside those goals, note your target amount and your target date. You’ll need this list as you go along the next questions.
2. What are your short term and long term goals?
Several folks fail to categorize their short and long-term goals. I also failed to distinguish these two before, and I never knew the importance of knowing the difference until I started investing.
Short-term goals – These are the goals you want to attain as soon as possible. Paying off debt, buying a gadget, and paying your monthly dues are just some of the examples.
Long-term goals – These are the goals that may take more years for you to attain such as preparing for retirement, building a house, and having a business.
Why does knowing the difference matters a lot, you ask?
You have to bear in mind that investing takes time. You can invest in a short-term investment (matures after a year or less) like a time deposit, bond, and crowdfunding or in a long-term investment (matures more than a year) like stocks, mutual funds, and government savings program.
Your investing options should, therefore, align with your goals. You also have to bear in mind that investing isn’t always the answer to your financial aspirations.
Perhaps what you need right now is to work on increasing your active income first before resorting to investments especially if it concerns your short-term goals.
3. Do you have the financial discipline?
Investing only means growing your savings. It is not a one-time capitalization but a consistent act of discipline. Remember, you cannot invest what you haven’t saved, and you cannot save without having the financial discipline to do so.
Start building your financial discipline by tracking all your income and expenses.
Just a tip: one of the simplest ways of instilling financial discipline is tracking both your income and expenses daily. You can use money manager apps for that.
4. What are your means to protect yourself financially?
Before you start investing, you must get yourself financial protection especially if you are the breadwinner of your family.
The importance of having financial protection
Consider having health, life, and property insurances to protect not only you and your family from financial uncertainties but also your investments — especially if they haven’t ripened yet.
5. Have you started building an emergency fund?
Having an emergency fund will safeguard you from unexpected financial shortcomings without touching your investments.
Most people suggest that an emergency fund should amount to 3-6 months of your living expenses.
For me, the numbers don’t really matter as long as it’s the amount that you think will still give you a financial peace should anything happen. But the bigger the better, of course!
6. What is your risk appetite?
Knowing your risk appetite will save you from a mini-heart attack while watching some of your investments fluctuate.
Scale your risk appetite from one to ten. If your risk range is 1-5, then you must invest in less risky investments such as bonds and time deposits.
If it is between 6-10, you can consider more aggressive investments such as mutual funds, UITF, and the stock market. Just know that the higher the risk, the higher the return on investments, the higher the potential losses as well.
Older people are recommended to invest in less risky investments while the younger ones can participate in more aggressive investments since there is still a great amount of time for their investments to grow.
7. Do you have positive cash flow?
Obviously, negative cash flow will lead you to fiscal deficits, or worse –- debts. If you start investing without having upright financial habits, it may wreck your financial standing instead.
Perhaps what you need right now is to focus on increasing your active income rather than investing all your life savings.
8. Do you have good debt management?
Debt management is not just about refraining from having bad debts but is also about avoiding lending too much money.
If you are lending too much money without asking for any interest, you are delaying the capacity of your money to gain interest from investments. Worse, you are having the financial risk of completely losing your money. It’s not being selfish, but you must learn to set limits.
Only lend your extra money and only take debts which can help you generate more income (good debt).
9. Do you surround yourself with like-minded people?
Be around with the people who share the same interests as you. They will help you in pursuing and improving your financial journey.
The articles and books you read also play a great role in your financial wisdom. If you haven’t found good books to read about investing yet, I suggest looking for volumes authored by Bo Sanchez, Chinkee Tan, Robert Kiyosaki, Benjamin Graham, and Elon Musk.
10. Have you made some research to understand more about your investment options?
Again, just because you have the right amount of money to invest, doesn’t mean you are ready for it. The things I just mentioned above are the prerequisites.
You still have to make further research on the investment options available to you.
Assess whether it aligns with your goals, risk appetite, time horizon, current financial standing, and money values. You should never invest in something you know nothing about — no matter how profitable you think it is.
Final Note If you have positive answers in these basic investing questions, then you’re all set! If not, try working on having a solid financial foundation first.
Remember, the process of investing or wealth-building is more than just acquiring money. Your financial wisdom and discipline are significant elements you should consider building first.
Money is just the end result of the financial values and discipline you have invested in yourself. Thus, you have to focus more on the process rather than chasing the money itself. Provide value on yourself and money will follow.