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Investment Path Advisory
Getting started on investments can be overwhelming, here are some guidelines that can help you carve your investment path.
By Don Hernandez, CFA
Have you ever wondered about your investing activities? If you’re a new investor, you’d probably have asked yourself multiple times, “How do I start?” or “What am I getting myself into?” For experienced investors, you’d probably have asked yourself the question, “Am I doing this right?” or “What else can I do from here?”
The thing is, there is no universal, strict rule on how to invest. In fact, if you search through Google now, there will be a ton of materials covering the topic with a lot of similarities, while some have differentiations that sometimes end up confusing people more on which ones to believe. Nevertheless, when you read through these rules of investing, try to remember Captain Barbosa in the movie, Pirates of the Caribbean: The Curse of the Black Pearl (2003), where he gleefully reasoned that “the code is more what you’d call ‘guidelines’ than the actual rules.” No, I do not condone piracy or any kind of dishonest activity, but as you read through references that speak about investing, please take them with a grain of salt (this article included!). Always go back to your own situation as your situation will never be exactly the same as any other investor.
Both in my studies and practice, I’ve gotten quite some ideas in responding to customer queries on how to go about managing investment portfolios. That’s why I came up with a simplified method, an easy-to-remember set of guidelines one may say, on remembering your core reason for why you are investing. During times of doubts, envy, confusion, fear and anxiety, and more importantly in times of joy and confidence, always remember to stick to your own Investment P.A.T.H.
Always remember to stick to your own Investment P.A.T.H.
Purpose of the Investment
Before anything else, let’s define the term “investing”. Investing is a purpose-driven activity where you match your financial decisions with your financial objectives. Before deciding anything for your investment funds, ask yourself the most important question: “What are these funds for?” Your wealth will always be allocated for something in the future – retirement, school funds, dream wedding, inheritance, house purchase, etc. People have the tendency not to think about these, and simply rest in the simple belief that idle money should earn. Although true, reflecting on the purpose set aside for specific portions of your wealth matter when it comes to the appropriateness of investments.
Further, there are some additional guide questions that can help you understand your purpose better. What are your financial goals? As an investor, do you require a specific practical hurdle rate over the next few years? How do I divide my wealth over the different financial goals that I have set?
I do need to emphasize further that age is only secondary to purpose when it comes to the suitability. For instance, traditional advisors would discourage retirees in investing in risky assets like equities due to the assumption that retirees have a shorter investment horizon. However, if the specific portion of wealth is identified to be for inheritance of the next generation, then the investment can weather riskier assets given the longer investment horizon. In contrast, young professionals should avoid taking huge risks if the identified portion of wealth is to be used for, let’s say, purchasing a house within the next 2 years.
Appetite for Risk
Risk is technically defined as the probability of loss due to uncertainties. It may be too technical as a definition, but you can remember this simply: risk arises from uncertainty. The more you don’t know, the more probable your losses will be. I try to make it simple by comparing it to driving in a new city. If you don’t have a GPS or a map to guide you, you’ll probably be more cautious in getting toward your destination – because of uncertainties.
Much like identifying the purpose or objective of the investment fund, it is equally important to know your expectations when it comes to risk. I know it’s difficult to grasp the holistic concept of risk-taking for starts, but there are two (2) things you can easily remember: (1) Risk Capacity, and (2) Risk Willingness.
Risk capacity is your wealth’s capacity to take in risk. In Filipino, this is your kakayanan ng bulsa. Your wallet can only take so much risk. If your investment funds are basically your life savings meaning you’re left with nothing if you lose it, your capacity to take risk may be dampened a little. On the other hand, if your investment funds are a mere 5-10% of your total wealth, then risk can be at your side.
Risk willingness is your own capacity to take in risk. In Filipino, this is your kakayanan ng dibdib. No matter how wealthy you are, there is only so much risk you can appreciate. It’s not your fault if you cannot stomach losses due to market volatilities.
These being said, if you get contradicting risk appetites between the above facets, always remember to stick to the more conservative one. Now, with the development of financial markets and investment environments, you may ask what to do or how to be more comfortable in understanding risks. This is where financial education plays its part. If you know more about what you’re getting into, the more comfortable you will be in taking risks because you reduce the number of uncertainties you worry about.
Lastly, do not be blinded by the performance of other investors you see in social media or in your circle. Your portfolio is tailor-fit for your own objectives. Your risk profile may be different.
Time Horizon
In the field of investing, time is your friend. The more time you can commit to an investment, the more flexible your investment portfolio will be. Remember, however, that investing is a commitment. If you initially committed five years, it would always be best to stick to that – whether your portfolio is gaining or losing midway. Of course, if the investment objectives have been met, you may have the option to stop, step back, and rethink new investment strategies. Nevertheless, make sure to be comfortable with the time horizon you will set upon yourself.
By lengthening your time horizon, your investment portfolio has more room to take in more risk. The more time you have, the more time you can give risky assets, like equities, to realize investment returns.
Nevertheless, determining the comfortable or appropriate time horizon may also pose a challenge. Some guide questions you can ask yourself may include: How long am I willing to hold onto my investment/s? Will my purpose of the fund be fulfilled within the stated time horizon? Am I amenable to extend my time horizon? Based on the purpose of the fund, will an extension be feasible and for how much longer?
Hurdles
In investing your funds, there are other considerations that you need to take note. Tax concerns, legal challenges including estate management, availability of funds, and other unique circumstances should always be well-thought-out. You see, it is important that your investment portfolio also matches your own values and principles. It is of utmost importance that you only put your money in investments that you will be comfortable associating yourself with. For instance, if you are not comfortable with gambling, then do not invest in securities that fund its operations – no matter how big an opportunity it provides.
Conclusion
Although no guideline, rule, or technique can ever guarantee a positive rate of investment return in the future, the Investment P.A.T.H. grants you something more than any kind of investment return can offer – peace of mind. Since I started with quoting the Pirates of Caribbean, I’ll just make the most of it. Captain Jack Sparrow did say “Not all treasure’s silver and gold, mate.” A good night’s sleep knowing that you are earning enough investment returns corresponding the type of risk you’re comfortable with is invaluable.
Establishing your Investment P.A.T.H. is challenging. Make sure to consult with your bank and investment partners, consultants, experts, and relationship managers so you will be guided with what would be best based on your profile. Once this is established, identifying investment decisions will be a lot easier.
One more note before I end, trading financial securities is an investing activity, but investing is not all about trading. There’s a lot to say about this, but let’s save that discussion for another time.
To end, if you feel doubts on your investment decisions…
If you find yourself confused on which decisions to make…
If you feel envious of the returns of others…
If you feel overjoyed about your gains…
If you are confident about a new investment…
… remember to stick to your Investment P.A.T.H.
Savvy?