Before Investing
one more turn and you've arrived at your destination.
Hello and welcome to another issue of this newsletter.
So you have reduced your expenses, and increased your earnings. Congratulations, you have done well.
You might want to pause and catch a breather, before proceeding to invest.
Investing unlike saving is about taking risk —the right kind of risk, for an expected return.
Risk
Risk here can be considered the chance/possibility of a) getting a return and how large that return can be, and b) not getting a return and how large your loss can be.
The probability of getting head (H) when you toss a coin is 50%. The probability should still remain the same, at 50% even if you toss it 10 times. Based on this, our expectation is that we get 5 heads for every 10 toss.
When you actually toss the coin, you might or might not get 5 heads. You are likely to get more than 5 or less than 5 head, and rarely get exactly 5 head.
Risk in investing is a question of how much variance, i.e. how much does the return vary from the expected return.
The more risky an investment is, the wider the range of return (high variance), and vice versa.
Having risk as the underpinning of investing guides your investment choices. But first, you need to know yourself.
Before setting out to invest, even after (you think) you understand risk, there are a set of questions or generally an investment statement policy/plan you have to create for yourself/investment manager, or with an advisor.
This helps you create what you want to achieve, and how you want to achieve what you want to achieve.
ISP
An investment statement policy is a document that states your investment policies, usually for your portfolio manager, which guides how your funds are invested by the fund manager.
This should take into account the following:
Aims and Objectives: These are goals you want to achieve, and the overall theme of your investments. This could be growth, income, capital preservation or a combination of any.
Risk/return profile: This states your willingness and ability to take on risk. This is a result after a risk tolerance assessment.
Time horizon: This looks at how long you want to stay invested.
Asset Allocation: There is a universe of assets to invest in at any given time. Asset allocation guides how much of your portfolio is in an asset class.
Selection Criteria: This is your screener, the criteria you use to decide whether to invest in a particular security within an asset class.
Other things to consider are your liquidity needs and the capital or funds you currently have.
It is important to note that investing depends largely on you —your beliefs, philosophy, and even temperament.
Remember, personal finance is personal.
See you soon
