My Money, My Choices
Gail Vaz-Oxlade is a personal finance writer, television host and radio broadcaster. Every Wednesday, she arms Metro readers with tips to keep spending in check.
Gail Vaz-Oxlade: 5 ways to tell you’re ready to start investing
You’ll know you’re ready to invest when you’ve got a solid financial foundation and you understand the options you’re considering.
|Report an Error|
Share via Email
Much of the personal finance media is given over to the world of investing. It’s sexy. A lot sexier than telling people to live within their means (geez!), get their debt paid off (ugh!) or make a will (sigh).
One of the questions I get all the time relates to how to step into the world of investing. I’m an investor. You should be too. But not until:
1. All your consumer debt is gone. If you’re carrying consumer debt it’s because you’re spending more money than you make, plain and simple. Job one is to plug the holes and get the debt paid off. No investment is going to return you more money than eliminating your expensive consumer debt.
2. You’re living within your means. That means knowing the difference between wants and needs. If investing is important, you’ll need money to do it. So what are you not going to buy so you have the money to invest? While budgets fall in and out of fashion, I still hold with this: If you’re not living on a budget you’re not ready to be an investor.
3. You understand what you’re buying. There’s an investment option for every kind of investor, but you must know what you’re buying before you buy. Would you buy a car without knowing how to drive? So why would you buy an investment without knowing how that investment makes money, or how it can lose money? If you can’t explain what you’re thinking of buying to a 12-year-old, you don’t know it well enough to buy it.
4. You’re in it for the long term. If you’re an “investor” you’re not a “speculator,” which means you understand when you’ll need to use the money you’re investing. This is called your investment time horizon. To be in equities, you have to have an investment time horizon of more than 10 years. Kids going off to post-secondary in five years? Have you changed the investment mix in their RESP to reflect a shorter time horizon?
5. You understand that all investing has risk, and that the greater the potential return, the higher the risk you’ll be taking. If you aren’t comfortable taking risk — if the idea of watching 30 per cent of your investment portfolio evaporate overnight makes you want to cry — then you need to choose investments that match your risk profile. High-risk investments with their potential for high return look sexy, but they aren’t for you if you end up not sleeping at night. Slow and steady is good too.
Some people see the stock market as a game. Some people see it as gambling. It’s neither. Nor is it for everyone.
You’ll know you’re ready to be an investor when you’ve got a solid financial foundation (no debt, an emergency fund, a spending plan) and you understand the options you’re considering well enough to feel completely comfortable buying them. Even a twinge of doubt means you’re not yet ready.
In the meantime, build a practice portfolio and learn about yourself as an investor.