Self-interviewing before investing
We all know that higher returns come with a higher risk. However, very often, many people make the mistake of underestimating the risk. They just follow the returns in an anticipation of earning even higher returns. Therefore, it is always advisable to carry on a self-interview wherein, you can ask a few questions to yourself before investing. Answer to these questions would help you make better investment decisions. In order to make it simple for you, we have curated a list of the top five questions that you can ask yourself before making an investment decision.
1. What is the purpose behind making this investment?
It is crucial to understand that creating wealth requires discipline and if you wish to be a disciplined investor, then you have to ask yourself why you are investing. If you are investing just because you have an additional surplus then, probably you would wish to contribute towards your wealth creation goal and would not mind taking the risk, which is above your actual risk appetite. However, if you are investing for your child’s education, then you would look at a bit conservative mix of equity and debt investment. Therefore, understanding why you are investing helps you to avoid taking unnecessary risks. Further, it also helps you to manage your emotions as you would have a lot more clarity on the purpose of your investment.
2. What is my investment horizon?
While investing, if you know your investment horizon, then you can choose the right investment vehicle to ride on. Many a time, we have come across people, who have an investment horizon of less than one-year and seek equity investments. This might look fascinating, as they only look at the past performance, but in the short-term, equity tends to be quite volatile and is not suitable for the short-term investment horizon. Therefore, when you are clear on your investment horizon, you can make a better product selection.
3. How much to invest and where?
Only knowing the purpose and investment horizon doesn’t help you. In order to get successful in investing, you also need to know how much you should invest and where. Doing so will help you to avoid under or over-diversification in a particular asset class. Further, it would help you to achieve your goal in a more sensible way. Therefore, asking how much to invest and where often helps you to have a well-diversified investment. As a thumb rule, one should save and invest at least 20 per cent of his/her income.
4. Is it the right time to invest?
Though there may not be the right time to start investing yet it can be said that there’s a perfect moment for everything. Say, you have a higher amount of debt, which bears higher interest rates. Therefore, here, rather than just investing, you should simultaneously try to pay off your high interest-bearing debt. Further, you also need to have a provision for any uncertainties. Then the uncertainty might be in the form of unemployment, bread earner's death, emergency hospitalisation, etc. Therefore, you first need to take care of these provisions before considering an investment. So, first and foremost, have a proper emergency fund, life insurance & health insurance in place.
Please read How to plan your emergency fund? This is a comprehensive guide on building your emergency fund.
5. Are you investing in yourself?
Warren Buffett has rightly pointed out that, “The best investment one can make, is an investment in yourself. The more you learn, the more you will earn.” Therefore, it is quite important that you also invest in yourself to build skills and remain updated. Also, irrespective of the field that you work in, do learn more about money. This is because understanding more about money will help you manage your emotions while investing.