Published 16 June, 2023
Many people start their investment journey with a specific product in mind and work towards acquiring that product. This approach often ignores the other factors critical in determining the right investment choice. Successful investing is less about the revenue itself, and more about how the investment works with your strategic goals, risk tolerance and exit strategy.
Asking for advice is the best way to make a final decision but a list of qualifying questions that can narrow down your choices may be a better approach if you are a hands-on investor.
As Landen’s Head of Wealth, Malcolm Strain explains:
‘Successful investing requires having a disciplined and repeatable process aimed at achieving your investment goals. Most investors know this, but few follow it well.
Our three sets of questions (outlined below) provide a guideline of the types of questions to ask yourself prior to investing. These will help ensure you actively align each investment choice with your strategic goals, risk profile, investment expectations, and holding period.’
Strategic Goals
1. Will this investment help me achieve my long-term investment goals?
Ensuring an investment is likely to deliver a return in line with your investment goals is a great starting point when making any investment decision. Knowing your investment goals is a key part of this. A simple way to break expected investment returns down is in terms of expected capital growth and income return. You may want either one or a combination of both. This will help determine the right investment type.
2. Does the investment align with your asset allocation strategy?
Successful investors generally have a well-thought-out asset allocation roadmap that guides their investment decisions. For example, younger investors tend to have greater allocations to growth-focused assets such as equities and real estate, while older investors tend to have greater exposure to defensive assets such as fixed income. Ensuring any potential investment aligns with your asset allocation strategy is core to successful investing.
3. Does this investment’s expected investment period align with your investment horizon?
Are you like Warren Buffet with a holding period of forever, or are you a short-term investor? Make sure an investment’s expected timeframe aligns with your investment horizon.
4. What is the right acquisition strategy for the investment?
While many investors invest the full amount they intend to at the time of investment, research shows that dollar cost averaging can be a more effective acquisition strategy as it allows investors to progressively increase their holding at regular intervals, including during periods of market weakness.
Risk
5. Does the investment align with your risk tolerance?
Understanding your risk tolerance is key to understanding your investment goals. Once you understand whether you’re a low, medium, or high-risk investor, you’re well-positioned to gauge whether an investment is a potential match for you.
6. Do you understand the investment case and the risks involved?
Successful investors generally write down the reasons they’re investing in an investment opportunity before they proceed. As a guide, being able to articulate a simple straightforward investment case is a good sign. Complex and hard-to-understand investment cases rarely succeed.
7. Is the investment’s volatility suited to my temperament?
Whilst volatility is connected with risk, it’s also worth considering as a standalone question because it’s one of the main reasons investors get scared out of their investments. Check how volatile an investment has been in the past for a picture of what may be in store in the future.
8. What’s the appropriate investment amount to ensure you’re not over or under-exposed?
Apportioning your investment position at the time of investment is about aligning the investment with your investment plan. For example, if you plan to diversify a $1,000,000 investment with 10% in a fixed interest fund, $100,000 is the appropriate position size.
Exit Strategy
9. If this investment doesn’t work out, how can I exit my position?
The term ‘liquidity’ is often used in financial markets to describe the amount of buying and selling that occurs in the market for a particular investment. Ensuring there is sufficient liquidity before investing is an important risk mitigation step in case you need to sell in the future.
10. What are the tax implications of this investment?
The tax implications of investing have caught many investors off-guard in the past. It’s recommended that you either educate yourself or talk to your financial adviser about the tax implications of any investment opportunity before investing.
“Successful investing is simple but not easy”
As Warren Buffet once famously said, “successful investing is simple but not easy”. The “not easy” aspects of investing have become easier for investors as it is now easier to access information when and where you need it. In our current economic environment, never has it been more advisable to ask the right questions of yourself before making an investment decision.
If it all starts to feel too complicated or overwhelming, remember that Landen is here to support you. Give us a call for an obligation-free financial health check and strategy review.