Many investors spend a great deal of time asking which share, real estate investment trust (REIT), bond or commodity to buy. Far fewer spend time asking the questions that should come before that decision.
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In my opinion, investing can be distilled into seven simple questions:
- Why invest?
- When to invest?
- How to invest?
- What to invest?
- Where to invest?
- Which to invest?
- Who am I investing for?
Why Invest?
Investing is a means to an end, not an end in itself.
Some invest to build passive income. Others invest for retirement, financial independence, wealth accumulation, or simply to preserve purchasing power against inflation. A clear objective gives direction, and more importantly, it helps determine whether a strategy is suitable in the first place.
If one does not know where he/she is going, it is difficult to even take that first step.
When to Invest?
This is the question many people tend to overthink.
For the long run, the better time to invest is usually when one is ready with sufficient capital and a clear plan. Waiting for the “perfect” market condition often means waiting for a very long time. As the adage goes, “The best time to invest was 20 years ago. The second best time is now”.
That said, money needed for emergencies or short-term expenses should stay outside the investment portfolio. For everything else, systematic investing is usually better than market timing.
How to Invest?
This concerns one’s investment philosophy and methodology.
Some investors prefer passive investing through exchange traded funds. Others select individual securities. Some favour value investing, some dividend investing, while others focus on growth. There are also those who combine multiple approaches, like myself.
The best methodology is not necessarily the one with the highest historical returns, but the one that can be consistently and comfortably followed through both good and bad markets.
What to Invest?
This is the question of asset allocation.
Asset classes such as equities, REITs, bonds, commodities and cash each have different risk and return characteristics. An investor’s main task is to decide which of these classes belong in the portfolio.
A basic two-class mix of equities and bonds may be enough for some. The Bedokian Portfolio, however, utilises all five to achieve a more balanced and diversified portfolio.
Where to Invest?
Once the asset classes have been determined, the next question is where to obtain that exposure.
Investors today can access markets all over the world, from Singapore to the United States, and from banks to technology. The answer depends on factors such as diversification needs, familiarity with the markets and investment objectives.
An investor may decide to invest in equities, but that equity exposure can come from many different places.
Which to Invest?
Only after answering the previous questions should security selection begin.
This is the question most people start with, but it is really one of the later questions that should be asked.
The objective is not to find the perfect security, but to identify securities that are suitable for the role they are meant to play within the portfolio. A security should be selected because it fits the framework, not because it happens to be popular at the moment.
Who Am I Investing For?
Most investors begin by investing for themselves.
As life progresses, however, the answer may expand to include a spouse, children, parents or even future generations. For some, investing eventually becomes less about wealth accumulation and more about wealth preservation and legacy.
This question may influence portfolio risk, insurance needs, retirement planning and succession arrangements. After all, investing is ultimately about people rather than numbers.
Conclusion
Many investing mistakes occur because investors jump straight to “Which to invest?” while neglecting the questions that come before it.
A share, REIT or bond is merely a tool. Whether that tool is appropriate depends on the objective, methodology, asset classes, markets and ultimately the people involved.
For those who have yet to embark on the investing journey, whether for oneself or for one’s acquaintance/friend/family member, it is worth asking these seven questions in sequence. The answers may not guarantee success, but they will provide a clearer framework for making investment decisions and building a portfolio that serves its intended purpose.
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