PWL Capital September 13, 2017 Personal Wealth Starting Out The Investment Process In the first video I created, I outlined how “What Stock Should I Buy” is the wrong question, and that you need to figure out a host of other things before you can get to the point to invest your money. But those aren’t the only things you need to figure out before you buy that stock. In today’s post, I’ll outline the investment process once you’ve got your ducks in a row and are ready to invest. So you’ve taken care of the other aspects of your financial life and are ready to invest. What next? I’ll outline the 6 steps you should take before deciding what stock you should buy: Decide what you’re investing for: You can’t make a decision on how to invest if you have no idea what the money is for. Are you investing for a house down payment in 2 years, retirement in 30? Determine your savings rate: how much you’re able to save will determine what rate of return you need to achieve your goal. If you can save a lot, you will be able to take less risk. If you need to push for a higher return as a result of little savings, you may need to take more risk. Figure out your risk tolerance: this one can be difficult to determine, especially on your own if you’ve never invested before, but it’s important to not take more risk than you’re comfortable with because if you bail out of the markets at the bottom, you won’t earn your required portfolio return. Determine your asset allocation: Your asset allocation will determine the amount of market risk you take within your portfolio and your expected return. Your assets should be diversified across asset classes, geographies, sectors, and among individual securities. Decide your investment philosophy: For the most part, there are two main ways to invest. There’s active management where you (or a portfolio manager) select individual stocks you believe will outperform, or try and time when certain assets will outperform and underperform based on current economic and market conditions. The second way is through Passive management. This is where you accept that markets are efficient and no one can reliably predict which assets will outperform. Instead, you diversify broadly, control fees and taxes, and earn the market returns. Allocate assets to individual accounts: Once you’ve determined how you’ll invest and what asset classes you’ll be purchasing, determine where these asset classes should go to minimize taxes. This is also referred to as asset location. Select individual securities: Only once you know how you will be investing your total portfolio, can you select the individual securities to be purchased. Ensure that these are appropriate based on your investment philosophy and tax efficient based on the account they will be held in. Revisit and Rebalance: Investing isn’t a set-it and forget it for 30 years approach. While I do believe it’s best to not tinker with it too often, it’s important to revisit your plan and goals to make sure you’re still on track, and rebalance the portfolio in case it has drifted from your desired allocation. As you can see, investing is all about the process and sticking with it. While the individual securities are important and you should control what you can within your portfolio, it is one of the final steps in the process. You can get 90% of the way before even picking which stock, security, or fund you actually buy. I’ll be elaborating on some of the concepts I touched on today in future videos, but if there is something specific you’d like to see, leave a comment below. Share: Facebook Twitter LinkedIn Email