Yahoo Finance 
4 simple questions to ask yourself before you invest
By James Yeo
If you want to secure your financial nest egg, one good way is to learn how to compound your wealth through investing in the stock markets.
However, there are many different opinions out there on how to invest in stocks. Everyone’s got an angle on what undervalued stocks you should look at, where the market is heading next, or even to skip investing in stocks in favour of ETFs (Exchange-Traded Funds).
It is easy to get overloaded with all that information and media reports out there. So how do you decide what is right for you – only you, and no one else? Here are four simple questions to get you started.
1. What are your financial requirements and objectives?
Different people have vastly different financial goals to meet. Many singles can easily save up to 50 per cent of their take-home pay when they have few or no commitments. On the other hand, middle-aged working professionals may have mortgage payments and dependants including parents and children to take care of.
On this point, many financial institutions can in fact help to perform fact-finding for you. Using the many tools at their disposal, they can help you to understand your current financial status quo, your goals and how to go about achieving them.
Personally, I feel that it’s no harm going for one such financial examination to see where I stand and lay out the complete picture of my finances. No one is telling you that you definitely have to buy any savings/investment plans with them, even though you can do so!
2. What does your risk profile look like?
Here’s a simple analogy:
How does getting an average of 6 per cent annual return sound to you?
Some people would be satisfied while some would say “meh…”.
How about 15 per cent annual return? Does it get you excited?
What if I say that you have to suffer a maximum downside of only 10 per cent for the first option (6 per cent) but up to 40 per cent downside for the second option (15 per cent return)?
Yes, you get the picture of how risks come into play here. Without factoring in your suitable risk profile, it is easy to aim for the sky and go wild on your expected returns.
However, the harsh reality is that you need to understand the volatility you can stomach before even proceeding on to any investment option.
3. Blending everything together
While investing for your future is no doubt important, but would you dump all your money into stocks investments at one go?
Probably not.
You would have to save for a rainy day first in case of emergencies and also have sufficient insurance coverage for your dependants, too.
In a nutshell, it is important to fit everything into your financial plan to help you reach your goals. This concept also applies to stocks investing where you should have a mix of blue chips for stability and smaller growth stocks to add a boost to your portfolio.
4. Track your progress
In Stephen Cowey’s “7 Habits of Highly Effective People” self-help book, the seventh or last habit is to “Sharpen Your Saw”.
By definition, “Sharpen the Saw” means having practising self-renewal in the four areas of your life: Physical, social/emotional, mental, and spiritual so that you can increase the capacity to create growth and change in your life.
When it comes to your finances, you should also practise tracking your progress in order to measure the returns of your investment. Have you outperformed the market in the past year? How about the last five years?
By keeping tabs on your investment returns, you can see if your investment methodology is working fine and continually make any necessary adjustments to it.
James Yeo is a finance professional in the Asset Management industry for more than 6 years. He also founded an investment blog at www.smallcapasia.com which is dedicated to helping retail investors find winning stocks.
Related articles:
