Are YOU Ready to Be an Investor?

Much of the personal finance media is given over to the world of investing. It’s sexy. A lot sexier than telling people to live within their means (geeze!), get their debt paid off (ugh!) or make a will (sigh). One of the questions I get all the time relates to how to step into the world of investing. I’m an investor. You should be too. But not until:

1. All your consumer debt is gone. If you’re carrying consumer debt it’s because you’re spending more money than you make, plain and simple. Job one is to plug the holes and get the debt paid off. No investment is going to return you more money than eliminating your expensive consumer debt.

2. You’re living within your means. That means knowing the difference between wants and needs. And it means prioritizing what’s really important over the desire to consume. If investing is important, you’ll need money to do it. So what are you not going to buy so you have the money to invest? Investing also takes discipline. Go screaming from the investment world at exactly the wrong time and you’ll make paper losses into real losses. Fail to set your sell-point and greed may take over where common sense should rule. Want to know if you’ve got the discipline to be an investor? If you’re not living on a budget you’re not ready.

3. You understanding what you’re thinking of buying. There’s an investment option for every kind of investor, but you must know what you’re buying before you buy. Would you buy a car without knowing how to drive? So why would you buy an investment without knowing how that investment makes money, or how it can lose money? If I had a nickel for every time someone told me they’d bought a “mutual fund” but couldn’t tell me what was in that mutual fund I’d be able to buy myself a bank! Knowing what you’re buying is step one in making good buying decisions. If you can’t explain it to a twelve-year-old, you don’t know it well enough to buy it.

4. You match your investment and your time horizon. Short-term money – money you’ll need in less than 5 years – needs to stay liquid since you don’t have enough time to wait for markets to recover should they dipsidoodle about. Long-term investing means being prepared to leave the money invested for more than a decade. Should markets take a turn, you have the time to ride out the ups and downs. Choosing an investment that matches your investment time horizon is important. And adjusting your investments as your time horizon changes is too. Kids going off to university in five years? Have you changed the investment mix in their RESPs to reflect a shorter time horizon?

5. You understand that all investing has risk and that the greater the potential return, the higher the risk you’ll be taking. If you aren’t comfortable taking risk – if the idea of watching 30% of your investment portfolio evaporate overnight makes you crazy – then you need to choose investments that will let you sleep at night. No, you won’t have the spectacular returns of those who fear nothing and take a leap into speculative investments. But you won’t have the losses either. If you’ve got the stomach – and the money – to go big or go home, the world of investing is huge and you’re limited only by your knowledge. If you’re a more conservative investor, don’t apologize or feel embarrassed for being a chicken. Stay true to your risk profile and you’ll be happy watching your eggs pile up slowly.

Want a great way to dip your toes into the world of investing without taking any risk so you can learn without any pain? Build a practice portfolio and watch what the investments do and how you react. Choose 10 investments you’d consider buying and track how they perform. Watch what happens and how you feel about the changes as your practice portfolio fluctuates in value. When you’re comfortable, you can put some money into the mix.

If the whole investment thang just seems too overwhelming to even bother, don’t give up. You can buy investments that reflect what the market as a whole, or particular sectors of the market, are doing.  Do some research on index mutual funds or exchange-traded funds (ETFs).  The idea is to eliminate having to make individual investment choices by mirroring what’s happening overall.

Some people see the stock market as a game. Some people see it as gambling. It’s neither. Nor is it for everyone. You’ll know you’re ready to be an investor when you’ve got a solid financial foundation (no debt, an emergency fund, a spending plan) and you understand the options you’re considering well enough to feel completely comfortable buying them. Even a twinge of doubt means you’re not yet ready.