Like many others, I am no stranger to the FOMO feeling whereby there is a constant fear of missing out on opportunities in the market. However, navigating the markets can be an extremely risky endeavor if there is minimal protection.
Look through any financial blogs/videos and there is a 101% chance you will come across the statement 'time in the market beats timing the market'. While its intention is good, it does not necessarily translate to impulse investing.
As such, before I started investing, I came up with a simple checklist to try and protect myself. These are the three items that I felt are relatively more important to consider:
Firstly, I looked at my own savings. The idea here is that one should always have a rainy day fund in case of unforeseen circumstances. To create this fund, I looked at my own expenses and liabilities to project my own 6 months fund.
To illustrate, I look firstly at my own expenses, which is roughly $500 per month. With this, I forecasted my fund size to be around $3000 ($500 * 6). Next, I look at my liabilities, which is my $30k student debt. My expected time period to pay it off is 12 months in equal payments monthly.
In total, I expect my future cash outflows in the next 6 months to be at a figure of $18k. ($3k + 6/12*$30k). Thus, I have to set aside at least $18k worth of funds before I start investing.
Once I set that sum aside, I ticked the first item on the checklist.
Secondly, I look at the level of debts I have. I am a firm believer in reducing liabilities rather than increasing assets. With the interest rate from my loans (~5%) being higher than what my investments might earn in the short run, I would end up with more cash outflows than cash inflows. As such, I feel that it is not wise to rack up on debts while trying to invest, as investment returns are not guaranteed but interests are.
Fortunately, my student loans have been granted a one-year interest waiver due to the Covid19 situation.
As a result, I plan to use this period to accumulate as many investments as possible without compromising my 6 months fund size. Also, to reduce my risks even further, I am putting my 6 months fund + extra cash for repayment into high-interest savings account instead of investing away all of the extra cash. Even though it might not reap the best investment exposure, it gives me a safe option of balancing between the debt repayment (coming in 9 more months) and asset accumulation.
Once my debts are accounted for, I ticked the second item on the checklist.
Lastly, I reflected on how long I would like to stay invested. This helps to adjust my mindset and manage my expectations. The markets do tend to be more volatile in the short run than in the long run. As such, there are several benefits by deciding on a longer time horizon.
1. It helps to stomach volatility in the short run.2. It helps to reduce fear when the market tanks.
Personally, I am looking at a time horizon of roughly 20 years. With this, I will be looking at investments whereby I can hold for 20 years. As such, my focus would not be on examples such as options trading which are more short-term and volatile.
Also, by having a longer time horizon, it means that when my investments are in the red, I do not have to quickly realise the loss to reduce further losses. Although there might be a risk in the investments making even more losses, the idea is to hold out the loss periods and make a gain if possible.
With this plan, I then ticked the last item on the checklist.
With these three areas covered, it then gave me more assurance to carry out riskier decisions such as investing.
Closing note
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*Disclaimer - I am not a professional investor and am a complete beginner in the investing arena. As such, my investment thoughts should be taken with a pinch of salt and challenged if need be. Also, it should not serve as investment advice, When in doubt, please do your individual research and check with your financial advisor.
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