I am often asked if investing in a particular business would be a wise decision. My invariable answer is “it depends.”
Investing requires a great deal of study not just of the potential investment but also of the investor. Here are the five steps that I have come up with in deciding whether to invest directlyor not.
1. Determine your investment return objective and risk preference.
Investing without having a goal in mind is like going on a journey without a destination. A doctor friend of mine once asked me when is earning enough, enough? Well, if you don’t have a goal, you will never know when enough is enough.
The cost of this goal sometime in the future compared to what you have now and what you can additionally invest will help determine what you need to earn on your money. And what you need to earn will also dictate the level of risk you must be willing to take.
2. Ask yourself if you are all SET.
SET is all capitalized because “S” stands for size of funds, “E” for expertise in investing and “T” for time available to manage investments directly. As to size of funds, people typically fall into the trap of looking at just the start-up cost without due consideration for the permanent or operating capital needed to run the business.
Expertise is a pre-requisite for investing. Invest in what you don’t know and see your money slowly drain away.
Time is not so obvious to the novice investor. Investing is like flying a plane. When taking off, full attention is needed from the pilot, and so with a business. That is why employees typically make poor direct investors.
Now if you lack even just one of the S, E or T, you are better off investing indirectly, either through hiring a business manager to initially run your business or investing in managed funds (e.g. variable unit-linked insurance, mutual funds and unit investment trust funds).
3. Scout around for the investment that best suits your answers to #1 and #2.
Scouting around includes a careful study of investment options to see if their risk/return potentials meet the criteria established in steps 1 and 2 of these guidelines. While asking for tips is a definite advantage, it would even be better if you were to do the studies and run the numbers yourself. If you feel you lack the acumen for doing the studies then you can always have a feasibility study made or just invest indirectly through managed funds that have onboard fund managers who do nothing but analyze investments to form optimal portfolios.
4. Manage investment risk through diversification.
Without exception, investments bear risk. The only way to manage the risk is to practice diversification. Farmers are very good at this. While waiting to harvest their major crop, they practice inter-cropping and perhaps even raise livestock to smooth out income throughout the year.
Diversification can come in many forms like launching more than one product or service, investing across industries, buying different currencies and even investing in different geographical areas.
5. Monitor investment performance.
Especially at the start, it would be hazardous to run a business or investment on auto-pilot. Be sure to monitor investment performance periodically and frequently at the start. Once you get the hang of it, you could probably loosen the reins and monitor less frequently but still periodically.
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