Demo of Educational Activities (cont) Below

Investment Preparation

45 Minutes

There are many reasons to invest, but first there are important steps you can take to become better prepared to make sound investment decisions. This topic describes those steps and guides you to develop an investment foundation that will help you stay on track toward your long-term goals.

Overview
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Lecture
Activity
Quiz

Overview

There are many compelling reasons why you should begin investing. Right now you may be motivated to get your money working for you, instead of having to work for every dollar you earn. But before you take the plunge to start investing or expand your investment portfolio, there are some important steps you should take to become prepared.

The most important thing you need before you make any investment decision is knowledge. We suggest you strive to gain a solid understanding of investment principles, personal financial planning, and general economic concepts prior to making any major investment decisions. Knowledge gives you confidence and increases your ability to make logical decisions about investing.

It’s also important to locate trusted, reputable, and established professionals to build your financial team. However, while it’s important to have a great team on your side, you shouldn’t use your advisors as a crutch. Your financial decisions are ultimately your own and you should become knowledgeable enough to evaluate the advice from your team of financial advisors.

Once you have some knowledge and key team members in place, create an overall investment plan. It’s important to plan across your entire lifetime and think through your lifestyle goals. Your plans are likely to change over the years, but get into the habit of reviewing and modifying your plan at least once per year.

Investment Preparation

Another key component of preparing to invest is minimizing your debt. If you are in debt, evaluate the interest rates you are paying on your balances. If you are paying more in debt interest than you are making on your investment returns, you should consider allocating more money to pay off your debt first.

Before implementing any investment strategy, build up an emergency savings fund and free up risk capital to use for your investments. Your emergency fund should cover you in case your income source were to dry up, allowing you to meet your obligations until you replace that income. Factor in the worst-case scenario when deciding how much you need in your emergency fund.

Once you have emergency monies set aside, then you should start building up risk capital. Risk capital is money that you can afford to invest. In other words, it’s money you can lose without putting yourself in a dangerous financial position.

Before making a specific investment, be sure to conduct due diligence on that investment opportunity. Do your homework before committing your hard-earned money. You should understand the risks involved, tax implications, revenue and profit margin trends, and other factors that will influence your potential investment.

It is also critically important to have an exit plan in place prior to making any investments. Your plan should detail what action you will take in a variety of scenarios. What if the investment goes up 25%; or what if it drops 50% the first day – what will you do? Having your exit plan prepared in advance will give you time to think through your options and help you make logical decisions that align with your personal financial plan.

Financial success typically doesn’t occur overnight. Stay committed to following a consistent, long-term investment strategy and don’t get bogged down in short- term gains or losses. Staying consistent with your investment strategy also means adjusting your plan as new changes take place with your financial situation.

Risk is always present in every investment decision. However, following these steps prior to investing can help you reduce your risk and align your finances to help you accomplish your personal goals.

Building Your Investment Foundation

There are good ways to prepare before you consider making your first investment. Follow these guidelines:

General Financial Knowledge
You should strive to gain a solid understanding of investment principles, personal financial planning, and general economic concepts to build your confidence and ability to make logical investment decisions.

Trusted Team
Locate a team of trusted, reputable, and established professionals who will stand ready to advise you about investment options. However, always keep in mind that your financial decisions are ultimately your own.

Personal Financial Plan
Create an overall investment plan that spans your entire lifetime. Start by thinking through your lifestyle goals and build a plan to meet them. Review your plan at least annually and make modifications as needed.

Minimize High-interest Debt
Revisit the interest rates you pay on any debts you owe. If your debt interest is higher than your investment returns, allocate more money to pay off the debt before you invest any more funds.

Risk Capital
Risk capital refers to money you can afford to lose without experiencing dangerous financial circumstances. Remember that some investments can lose more than you originally put in, so your risk capital should be able to cover such investment consequences.

Emergency Fund
Build up an emergency fund in your savings account that would cover your expenses until you could replace your income. Emergencies will come up, and there will be another market collapse. Be prepared by saving enough money to cover your bills for at least 3 months longer than you think it would take you to replace your income. If people working in your industry experienced large layoffs or extended unemployment during the last recession, save even more in your emergency fund.

Due Diligence
Do your homework before you commit any of your hard-earned money to an investment. Investigate the risks and potential rewards involved. Explore all the areas that may affect this investment – tax implications, fees, trends, volatility, and any other factors that may have an impact.

Exit Plans
Outline an exit strategy that details actions you will take in a variety of scenarios. What if the investment goes up 25%, or what if it drops 50% the first day? Think through all the options and plan to make logical decisions aligned with your personal financial plan.

Consistency
Since success won’t happen overnight, make a commitment to follow a consistent, long-term investment strategy. Don’t get bogged down in short-term gains or losses. Adjust your plan whenever new changes take place.

Two Powerful Emotions that have Impact on Our Investments

Greed and fear often affect investors’ financial behaviors. These emotions are so common that there are indexes that measure their market impact. CNN’s Greed & Fear Index is one such tool. Look at the index in 2008 (in the midst of the recession), compared to 2018 when the stock market was at near all-time highs. What emotion was driving the market in 2008 vs. 2018?

You should remain disciplined to stick with the plan you establish and the exit strategies you create – profit or loss. Your plan allows you to decide on your financial goals before fear and greed mix into your reasoning.

Common Ways People Get Off Track

To understand how best to prepare, it’s helpful to look at common mistakes people make:

  • Lack a clear financial plan.
  • Do not have a trusted financial mentor, advisor, or coach.
  • Poor financial choices due to lack of financial knowledge and emotional triggers.
  • Lack of confidence to make necessary financial moves.
  • Poor financial choices due to emotions. Fear and greed motivate most choices.
  • Take advice from the wrong people – unqualified salespeople, family, and friends.
  • Set unrealistic expectations of investment returns.
  • Do not take advantage of employee benefit plans or tax laws.

Conclusion

You may be eager to begin investing, but taking the proper steps to prepare yourself for taking that plunge may help you avert some of the inherent risks investments always pose. Gaining a solid knowledge base forms the cornerstone of your investment strategy. This foundation can be supplemented with the advice of a trusted team and conducting due diligence research on every investment you consider. Having an adequate emergency fund, knowing how much risk capital you have available, and careful exit strategies offer you a fallback position should an investment not go the way you planned. These preparatory steps can help you develop an investment portfolio that aligns with your long-term goals.

Activity: Prepare to Invest – Build Your Plan

This activity is designed to help you take the necessary preparatory steps to get ready to begin investing. Assessing your current knowledge level and making a commitment to complete each step can help you develop a sound investment foundation.