It’s pretty common for me to be asked the question, “What are you investing in right now?”
I like to counter this question by telling people that WHAT I’m investing in isn’t as important as WHY I’m investing in the first place. Or better yet, what the goal is of my investments.
A quote you have probably heard states:
“If you don’t stand for something, you’ll fall for anything.”
The basic idea is you must have a reason or a purpose for what you are doing. If you have a purpose, then you have a driving force behind your actions. And if there is a driving force that you believe in, it will be much harder for a person or a situation to derail you from your course. Investing is no different.
Throughout your investing timeframe there will be many things that attempt to sidetrack you from your path, and it is your ability to stay the course that will ultimately dictate your success or failure.
Here are three reasons it is important to understand your “Why” before you begin investing.
KNOW YOUR TIME FRAME
Knowing the timeframe for your investments is key to finding the right investments to implement. By understanding the reasons you are investing, you can start to work backwards to the “What” you are investing in.
For example, if you are saving and investing for retirement and are currently in your 30’s, you have plenty of time to reach your goal. You don’t have to worry about the short-term fluctuations of the markets.
Having a long timeframe to reach your goal allows you to be more aggressive with your investments.
Now, if you are 30 and looking to buy a home in the next three years, your timeframe is much shorter than in the previous example. You’ll need to be more judicious with the money that you are saving for this goal and probably shouldn’t take too much risk.
KNOW YOUR PURPOSE
Friends recently sold a house and were looking to invest the proceeds, so they asked me what I thought they should invest in. They had several recommendations from other people who were investing in an assortment of things and wanted my advice.
Before giving them any wise recommendations, my first question was, “What is the purpose of this money?”
They told me that they were looking to buy another home in the next two to three years and wanted to use the money as a down payment. They hoped to grow the money a bit before doing so.
Since they needed the money in the next two to three years, this was not money with which they could afford to take a big loss. We ultimately decided it was not a good decision to take a lot of risk with this money.
Now, imagine if we had invested that money in some type of risky investment. Sure, there would be a potential upside. But what if the investment took a downturn over the next two years and they lost 20%, 30%, or even 40% of their money? They might not be able to buy the home they were planning to.
The point is, if you don’t know “Why” you are investing and are simply trying to get the greatest potential return on your money, you might find yourself in a bad situation. Sometimes it’s better to focus on getting a return of your money and not a return on your money.
As you work toward any goal, you encounter numerous distractions. When investing, it seems like it is impossible not to second-guess yourself.
You will constantly be told about the “next big opportunity”. Your friends will tell you about a hot stock tip they heard on TV or a business they are starting in which you should invest. “It’s going to be HUGE, bro!”
No one would start a company if they didn’t think it was going to be successful. There is a certain level of optimism you need as a small business owner to help you through the tough times. But you don’t want that optimism to blind you from reality.
WHY IS THIS IMPORTANT TO YOU?
Every idea you hear about will be told through the rose-colored lenses of optimism. You must be vigilant to make sure you are doing your proper due diligence on any of these opportunities, making sure they fit into your investment portfolio, not someone else’s.
Also, if you turn on the TV, you are bound to hear the “Chicken Littles” of the world telling you how the sky is falling and you should sell all of your investments and go to cash.
Don’t let the Chicken Littles scare you into rash decisions. Market timing is a losing proposition, my friend.
Maybe the market does take a downturn over the next year. But that’s ok, because you’ve properly allocated your assets into the right buckets based on their purpose. The buckets that might be hurt in this event won’t be needed for a long time, so you aren’t worried about them making an immediate comeback.
If you know the “why” of your investments, you’ll be able to reference that “why” whenever someone tries to pull you in a different direction. And the less directions you are being pulled in, the better!
IMPROVE YOUR QUALITY OF LIFE
There are three main reasons you invest.
- Maintain Purchasing Power
- Reach Long-Term Goals
- Increase Quality of Life
This third one is the final reason you need to understand the “why” of your investing.
The one thing you don’t want your investments to do is cause an increase in your stress levels. If you are taking on more risk than you can handle, and that risk is causing you to have trouble sleeping at night, you can’t eat, you’re having panic attacks, etc., you are investing the WRONG WAY!
Investing should be done to increase the quality of your life, not decrease it by adding unwanted stress.
By understanding the “why” you’re investing, and by properly implementing the right investments to match up with that “why,” you will be able to simultaneously improve the quality of your life without greatly increasing your stress.
The reason for this is simple: you have a plan and you stick to it.
- You know how long your time horizon is, so you aren’t confused about when you’ll need that money.
- You know that you have the right investments in place for your needs, so you can avoid the distractions.
- And you know that you have a plan in place for reaching your goals, so you can sleep well at night.
So before you get lost in the endless barrage of “great ideas” for your investment portfolio, take a little time out and think about why you are investing in the first place. Ask yourself what that money will be used for in the future and how comfortable you’d be willing to put it at risk.
I’d love to hear your thoughts! Head over to the Capable Wealth Facebook page and get involved in the conversation. Let me know why you are investing. Do you get distracted at times? And what do you do to manage the information overload?