Investing can be overwhelming. In journalism, research, or even police investigations, the most basic approach to gathering information is referred to as the 6 W’s (more accurately, the 5 W’s and 1 H or 5W1H): What, Who, Where, When, Why, and How.
You can take the same approach as you figure out how to go about investing:
WHAT. The first thing you ask, of course, is, “What should I invest in?” This is about the broader asset classes like equities, fixed income, real estate, etc. Many studies have shown that your asset mix is the single most important factor in your investment performance. In fact, asset allocation can account for more than 90% of performance. And historically, equities perform best in the long run. The individual stocks you pick are not as critical as being invested in equities per se, these studies show, so you’re better off investing in index funds. Diversification is key, so temper the volatility of stocks with bonds and real estate in your portfolio.
WHO. The next question is, “Who should invest?” One thing to consider is whether you should go DIY or just outsource the investing to a professional. If you decide to outsource, you have a lot of choices: banks, insurance firms, investment companies, and asset management companies. Just select reputable firms. And don’t give your money to individuals, no matter how well-known they are! Now, if you decide to invest on your own, you need to make sure you have the time, the aptitude, and the discipline for it.
WHERE. Another thing to ask: “Where should I invest?” For paper assets like stocks, bonds, and currencies, the world is your oyster. It is easier than ever to invest in global financial markets. You can, of course, stick to the local stock and bond exchanges. As for real estate, it’s location, location, location. You can concentrate on your immediate vicinity or go further.
WHEN. This is the trickiest part. “When should I invest?” is both about frequency and timing. Again, there are studies that show that time in the market is more important than timing the market. This means that instead of figuring out when to come in and when to go out, which is very difficult, you just need to invest in the long haul, regardless of the ups and downs in the market. You save from paying commissions and taxes and at the same time you take advantage of compounding returns. As to how often you should invest, it can be every month or quarter, as long as you do so regularly.
WHY? “Why should I invest?” is actually the first question you should ask yourself. People who have a little extra always ask, “Where should I put my money?” That’s wrong. You need to determine what your goals are. If you don’t know what you’re investing for, you’ll make wrong decisions. Knowing why you invest will inform your decision on what kind of investments you need to get into. If your goal is to save for retirement 20 years from now, then investing in riskier assets like stocks will make sense. But if your goal is to save up for a down payment for a house you plan to buy three years from, you’re better off with fixed income instruments. Having a strong “why” also will give you the commitment and discipline to invest. If you really want to be financially free through passive income like from rental income, then you will do what it takes to sacrifice your short-term wants to pay off your monthly amortization.
HOW. This is the question that confuses most people: “How do I invest?” Educating yourself through books, magazines (like this one!), conferences, seminars, blogs, etc. is the key. If you decide to outsource, then it’s actually very easy. But if you want to do it on your own, or in combination, then that’s when you really need to invest in your financial education on an ongoing basis.
Now get started!
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