Don’t skip the basics when taking investment decisions, warns personal finance analyst
I’ve explained that The Rock probably has a more systematic approach, but he doesn’t have time for that.
When we started talking about finances he was similarly keen to skip over the basics, and get straight to whether I would put his JISA into meme stocks.
In both cases, his position is entirely understandable.
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Hide AdHe’s a 14-year-old in a hurry. From his perspective, why would you put in the hard work if you could skip straight to the fun part?
Unfortunately, when it comes to investment, his approach isn’t enormously unusual either, especially at the moment.
There has been a boom in people wanting to plough into the latest meme stock or crypto-coin, and it’s a safe assumption that not all of them have taken the time to get on top of the rest of their finances first
The problem is that you can’t afford to skip the basics. You can’t switch straight from cake and beer to full-on weight-lifting without doing yourself a mischief.
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Hide AdYou need to commit to protein, cardio and sacrifice first. Likewise, before you can make a start on investment, you need to draw up a sensible budget to pay off expensive debts, get the right protection in place in case of nasty surprises, make sure you’re putting enough aside for retirement, and build a savings safety net to cover three to six months’ worth of essential expenses.
You need to build the fundamentals of financial resilience systematically.
If you skip the basics, however, good your investment strategy, there’s a real risk life will send it off course.
The easiest way to see this is to take two people facing the market crash at the outset of the pandemic.
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Hide AdOne had done the basics first. They had £5,000 in savings and £5,000 in investments. Unfortunately, when the market fell, their investment portfolio halved to £2,500.
Meanwhile, they lost their job and spent the full £5,000 of their savings before they got back on track.
In the months since the market hit the bottom, the subsequent recovery has pushed their investments back up to £5,000, so they’ve topped up their emergency savings, and are resilient once again.
The second person skipped saving, and at the outset of the pandemic they had £10,000 in investments.
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Hide AdMarket falls halved the value of their investments, which left them with £5,000. Then they lost their job and spent the full £5,000 before they got back on track.
It meant they had nothing left to take advantage of the market recovery with, so they’re left in a vulnerable position, with no savings or investments.
It’s why for your finances to be truly resilient, investment only makes sense when everything else is in place first.
But while for some people, the day they get stuck into investing can’t come soon enough, at the other end of the spectrum, there will be those who will be keen to put this stage off for as long as humanly possible.
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Hide AdThe investment world for them isn’t enormously unlike the weights room in the gym for me. It’s a horribly unfamiliar place, where everyone else seems to know what they’re doing.
At best I risk making a fool of myself, and in the worst case, I could end up doing some serious damage to myself.
However, to be financially resilient, investment has to be part of the plan. It offers potential growth that can make a significant difference to your lifestyle.
Even if you’re not the kind of person who wants to take big risks, over time, a balanced portfolio and a ‘get rich slow’ mentality, could help you afford your dream home, the trip of a lifetime, or to give your kids a helping hand in their adult life.
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Hide AdIf you’ve never considered it before, it can be an overwhelming prospect.
However, it’s worth bearing in mind that even in the gym you don’t have to lift the heaviest weight off the rack and attempt to bench press it alone; you can get an expert to offer guidance, start small, and learn as you go along.