Most people are comfortable with spending money
but what about investing money?
Investing if done right is a great opportunity
because it allows you to multiply your money
without putting in extra hours of work.
And in one day,
the investment income can even replace your work income
But if you aren’t sure what you are doing,
investments can certainly bear some degree of risk.
That’s why many of my clients and even
followers on social media often ask me
what and where they should invest in.
They hope to get a simple answer…
So in this video,
I want to share 7 questions to ask yourself
before you invest in anything!
Hey! Welcome back
This is Thomas
Here to help Canadians make better choices on
Retirement
Wealth
And Insurance
My goal is to make sure you take 1 or 2 ideas home
And start making better financial decisions today
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Please consider subscribing
so you will never miss any of my videos
Let’s jump into it!
The truth is,
investment is a very personal choice and
the ideal investment are different for each person.
There are different types and styles of investing
- and what works for one person
might not work for another.
Think about real estate investing,
for example,
if you are a hands-on person
and enjoy being a landlord,
it might be amazing for you.
But if you just want something
to put your money in and leave it alone,
then real estate might not be your thing.
The funny thing is
investment has less to do
with what kind of return you get
and more with how you want to live your life.
It’s a life long lesson
so you have to enjoy it first.
so once you have answers to the following
7 questions,
you’ll have more clarity on what to invest in.
let’s get right into it.
Question number one is
“What is the goal or purpose of my investment?”
I believe
everyone wants more money in their pocket,
but the key question is,
what do they want to do with that money.
Usually the Typical goals are
to have more money for your retirement,
fund a child’s education,
travel more,
upgrade your home and so much more…
There could be countless motivations
to become an investor.
What’s important is that
do you know what is
the expecation of this investment.
Because your goal determines the time frame
and the return of your investments.
It makes a big difference whether
the purpose of your investment is
long-term or short-term.
When you pursue long-time goals
such as having a retirement fund or
supporting a future kid…
Then it’s usually okay to take more risks
- especially if you are young.
The reason for that is that even if you lose
some money because of a risky investment,
time is on your side and over time,
you can more easily recover from recessions.
But, if your investment goals are more short-term,
like getting ready for a new place in 6 months.
A recession can mean that
you don’t achieve your goals.
So, in the case of short-term goals,
you want less volatile investments.
This means there are fewer ups and downs
and it’s more predictable.
To sum up, begin with the end in mind.
Get clear on your investment goals first,
and then work the math backward and
find out which investment vehicle
can give you the needed rate of return.
This helps you stick to your plan
without making hasty decisions out of panic.
Then Question number two is
“How much are you willing to lose?”
Yes, when you invest,
it might be much nicer to think about
how much money you could make…
Yet, the question of how much you are
willing to lose is more important.
The reason for this is that
every investment comes with a risk.
And there is the possibility that
you lose money at some point.
That’s why many experts recommend
never invest money that
you can’t afford to lose.
I always recommend make sure you
have a postive cashflow each month,
and have your rainy day fund set up first.
once you have that ready,
it’s time to think:
How much of this money would you be
comfortable with losing?
If you have 1,000 to invest,
how do you feel if you lose 100?
or 200? or 500?
Having an answer to this will help
you understand how you deal with
risk and how risk-tolerant you are.
The thing is,
most human beings naturally have a loss aversion.
We are usually more afraid of losing something
than we enjoy gaining something.
This loss aversion causes many investors to panic.
When the stock market reaches a low,
they freak out and they decide
to sell their stocks at a loss.
Perfect example will be in year 2020,
the US stock market was down 30%
in less than 4 weeks.
Then just when everyone thought
this would get even worse.
Guess what.
Everything was recovered in 2 months time
and now it’s all time high.
So, it’s a good idea to see what’s your attitude
towards investment and your risk tolerance overall.
The third question you want to
ask yourself before investing is
“When and Why would I sell this investment?”
This question kinda goes hand in hand with
the first question because you have to think
about this in advance to avoid selling in a panic.
There might be times when
you invest in something and the media,
all your friends,
and everyone around you
tells you that you have to sell NOW.
But it might not align with your goals at all.
So, create a set of rules for yourself
under which circumstances you are allowed
to sell your investment ahead of time.
This protects you in case the media makes
another investment look more exciting.
If you don’t have your “selling rules” created
you might sell your initial investment on a whim
and hop on to the next thing.
A few months later,
another investment strategy becomes popular
and you have to sell again.
It’s a never-ending process.
So, to save yourself some headache,
stick to your plan.
If you know why you are doing
and what you are doing,
you wont fear of missing out.
The rules you create for yourself
could be something simple like:
“my expecation to own this investment is
around ten years because it’s for my retirement”
or
“I will change my investment strategy
when I am down 10%”
Now, question number four you want
to ask yourself before investing is
“Where do you start investment?‘‘
This is important because to be fair,
there are too many choices to begin with.
Take stock market for example
You can walk into a bank to start with
the investment since you already have
your checking and saving accounts there.
And you parents been using them as well.
Or you can go to platforms such as questtrade
and you operate everything by youself.
You can also hire an advisor to do
asset management for me.
Or you can join an robo advisor platform like
wealth simple to pick and choose for you.
Each platform has their own pros and cons and
therefore many people will fall into the analysis paralysis
my suggestion is.
Just start with one first.
Then once you get the hang of it,
then choose another revenue.
At different time of life stages,
the platforms you work with are also different as
your experience and resource also changes
as times goes on.
So I believe
An Imperfect action is always better than perfect inaction
5. Are you diversified enough?
Question number five is
“Am I diversified enough?”
or in other words,
do you have a risk-taking strategy?
Diversification means that
you don’t put all your money into
one single investment.
This is very risky because
if that one investment fails you lose all your money.
You don’t want to bet all your money on one horse.
This is where diversification comes into play.
and I have my micro and marco diversification.
Let’s start with the micro diversification.
For example,
if you want to invest in the stock market,
don’t invest in stocks from only one company.
Rather, you want to create a diverse portfolio.
Same in real estate,
most real estate investors start with
one property but they soon buy more,
in case anything happens with the first property.
And as for the macro aspects.
I always suggest people should also diversify
by having different asset classes.
Having different ETF or mutual funds
in different sectors are still considered
as one asset class.
In order to truly diversify,
I suggest at least 5 asset classes,
cash, paper asset, real estate,
insurance, and commodity.
I will explain these types of assets
in the future videos.
This can work well because
even if one of the markets is down,
you can still rely on your other investments.
The downside is that you have to organize
all your different investments and
you have to learn strategies for all of them.
In other words,
it takes more time.
But that’s exactly why it’s so important
to think about this early on.
If you are someone who wants to invest
as little time as possible in their investments…
Then your diversification strategy will look
different from someone who has more time.
No matter what you decide to do,
make sure you diversify somehow
to lower your risk of losing money.
Okay,
so what is question number six
that you want to answer before you invest?
It’s “What is my tax strategy for my investments.”
Yes,
when we invest,
we also have to think about taxes.
especially we live in Canada.
One of the countries that can
legally take 50% of your saving.
Just Because you make a lot of your investments…
What counts in the end is
how much of the money you can keep.
And the last thing you want is to pay hefty taxes.
let me explain how this works. In Canada,
there are three major investment taxes you need to pay.
First we have the captial gain tax.
If you sell any kind of assets –
such as stocks, bonds, or real estate –
for a price that exceeds the purchase price,
this is called capital gain.
And 50% of the capital gain will be taxed.
Here is an example:
Let’s say you bought an asset for $100,000
and now you sell it for $200.000 –
your capital gain is 100,000
and that 50% of the the gain which is $50,000
will add towards the income
and push your tax bracket higher.
But what if I just let my investment
such as stock or mutual fund to sit and grow.
Yes you can do that!
But each year these investments will
build interest or distribute dividends.
And those two you have to pay taxes as well.
Now,
there are a few ways
how you can lower your tax bills in Canada.
The common solution will be u
sing a tax shelter plans such as RRSP and TFSA.
let me briefly mention what they are:
TFSA is an account that lets you use
your after-tax money to invest.
And any investment income produced —
including interest, dividends, and capital gain
are tax-free.
Therefore for extreme cases,
you have literally,
can make a million dollar in your TFSA,
not only you don’t have to pay a dime to CRA,
but you also consider as low income and
received extra benefits from the government.
Vice versa,
The money you put into RRSP is
deducted from your taxable income.
Therefore,
you are using pre-tax money to invest and can
efficiently offset huge foreseeable capital gains.
The downside,
all the money produced are 100%
considered as income upon withdrawal.
And again,
I made a whole YouTube video series
on RRSP and TFSA,
so make sure to watch them for further information.
This gets us to the last question,
which is
“Do I have someone to talk to
and learn from them?”
As I mentioned before,
sometimes it’s best if we just talk to someone
who already has experience with investments.
They can give us valuable advice
we wouldn’t know otherwise.
And sometimes it can be
an investment community such as an online forum.
Still,
make sure you talk to someone
who has the proper experience.
Plus,
preferably talk to someone
who has similar goals to you.
Be mindful though,
a lot of people will only share their one huge victory
but they will not share their rest of
the 9 investment that loss money.
Once you find a person you can trust,
make sure to ask clever questions and
absorb any lesson they can give to you.
Everyone has their own opinion about their strategies,
it’s great to use them as reference but at the end.
You have to make your own decision.
Because after all,
it’s your own money.
Now I hope you found these 7 questions helpful.
Like I said in the beginng
Investing is a life long lesson,
so just learn 1 thing new each day.
More importantly take action and learn from the mistakes.
And eventually you will be your own investment guru.
Hey
Thanks so much for watching!
Can you tell me what is one investment mistakes
that you made before
put it down in the comments below
so we can learn from each other!
This is Thomas!
And I will see you in the next video!