5 Ws of Investing
One of the most important things you can do when planning, maintaining, revisiting, or just plain worrying about your investments is consider why you are investing in the first place. “Well, I was just wanting to make more money,” you might say. To which I’ll ask, “And what are you planning to spend that money on?”
But it’s more than just “what.” There’s also the when, why, how and who. Saving your money for a dream vacation is the what. Even more important is knowing the when. There’s not enough time for any at-risk investment to bounce back before your vacation next summer. But if you are planning a celebratory retirement vacation that’s 15 years from now, investments including equities and corporate bonds have enough time to recover from short-term losses.
The why is also important. “We wanted to see the Mediterranean and thought a cruise might be nice.” This reasoning may indicate that the exact cost of the trip, as well as the timing, may be flexible. This, of course, leads the how…or more specifically, “how much?” Combining the why and the how might tell me that while your dream vacation would be $10,000, you’d have a great time and be quite satisfied if you only had half that much to spend.
The Who is a rock band. OK, in our context “who” refers to yourself and the others who will be managing and monitoring the investments. How much investing experience do they have? How much tolerance do they have for the ups and downs of the market? Do you get excited and dump more money in when the markets are going up, only to get scared and yank it out when it goes down? We all have our limits. What is yours?
Knowing the what, when, why, how, and who of your goals for a particular investment will help keep you focused and on track, less likely to make the common investing mistakes. For instance, when you get that “hot” tip from your cousin about an Indonesian stock that can’t fail to hit it big, you can review your goals. In doing so, you might note that your trip is now 5 years away. You know that 5 years is not a long time when it comes to stocks and that while you will very likely make money there’s about a 20% chance that you might not.
You and your spouse also discussed that the 5-year mark is not set in stone. If the vacation wasn’t until year 7 or 8 you would both be fine with that. Maybe the stock tip will help. You would both need to consider your tolerance for risk and decide if missing out on the trip, even if it’s delayed, is worth the risk. Because you’ve considered the what, when, why, how and who or your goals, you are less likely to deviate from the plans you’ve made to get you there.
This article was published under the title "What you'll do with the money you make is of major importance" in the Wichita Falls Times Record News on October 7, 2012.