Principles of Sound Investing

When it comes to breaking down some of the complicated tasks in life, we tend to focus on strategies or step-by-step guides. This can work when the job is simple. Like, “How do I make chocolate brownies?” Google answers, “First get a pan. Then turn on the oven.” However, reducing complex elements of our life (e.g., investing) to a simplistic how-to can actually disempower us.

Investing is not the place to take short cuts.

Without knowing why we do something, we are forever locked into adherence to a strategy and not the freedom of understanding the underlying intentions. We then argue about the smaller points, rather than fundamental truths. Investing is not the place for us to take short cuts.

We believe in principle-based investing. Operating from an understanding of values, needs, and one’s long-term objectives is paramount to being truly empowered and ultimately successful. When it comes to investing, it is often necessary to “back up the truck” so to speak. We need to pull up to the curb, grab a cup of tea and sit with the notions of what we are trying to accomplish and why.

It is essential to know what an investment really is.

First, it is essential to know what investing means. There are so many misuses of the word in everyday language and it can get confusing. Investing involves allocating resources or acquiring an asset with the specific goal of achieving appreciation or a financial reward.

Anything that begins to depreciate the second it is purchased cannot legitimately qualify as an investment. We often hear people talk about buying a new outfit for a job interview as an investment. It is an expenditure with the goal of making you feel good, and there is nothing wrong with that. But, it doesn’t qualify as an investment. However, if you are taking a course that will lead to a pay upgrade, you are making an investment. If you borrow money to start a business (with a business plan that has been approved of by two people outside your family), with the express goal of making a profit, you are making an investment.

It is as important to know what you are getting into as how you will get out.

When you purchase a home in market like Metro Vancouver, you are in more of a hybrid situation since a home’s biggest job is to provide shelter. However, in this particular real estate market it does have an underlying investment component. It would not be considered a pure investment unless the plan was to sell when the market was high, as you would a stock or inventory for your business.

Another element of whether something is an investment is your exit strategy. Most pure investments have an achievable endpoint where the gain will be realized. It is as important to know what you are getting into as how you will get out. And, the “getting out” is often ignored. Having a goal with an exit strategy are components of a good investment practice.

Getting Started

There are essentially two different ways to enter into investing:

  1. Your workplace offers you options to invest. The best scenario is when your company offers to match what you invest.  Take advantage of these options.
  2. You initiate your own investment process. This is often a more challenging process when starting out.

If you are lucky, your employer has a matching retirement benefit plan. If so, this is your first and easiest place to begin an investment program. It is your job to understand what is being offered and how it will benefit you. It is shocking how many people do not take advantage of company stock purchase plans or matching savings programs.

If it is up to you to initiate your investing process, it should typically occur when:

  1. You have surplus cash flow.
  2. You have adequate cash reserve (not just access to a line of credit).
  3. Most, if not all, debt (except student loans) has been paid off.

Because investing is seen as kind of “sexy”, we often want to rush into it without having a solid economic foundation. If you are ready to move forward, it is essential to establish the objective of your investment strategy and the length of time you have to realize your goal.

What and how we invest is dependent on how long we have in the market. Time is a great advantage. Most diversified well-balanced portfolios will appreciate over the long term, but they will suffer many short-term declines on the way up. It is imperative that you do not liquidate during a decline. Selling out low can be terrible and disheartening. And of course, is often unprofitable.

Know where and how you will invest.

Another important consideration is to know where and how you will invest. It can be difficult sorting out what each financial professional and institution can do, and what they cannot. Do some homework and determine for yourself what will be the best fit for you.

You do not have to get fancy to be a successful investor. By being principle-based and understanding your own needs and long-term goals, you are in a better position to advocate for yourself and attract the right strategies, advisors and methods. Remember, the strategies are the easy part. Developing solid principles for yourself takes a bit more time, but positions you well for long-term success.

Useful Resource: Tax Calculators & Rate Tables

Need help figuring out tax implications when investing? These Ernst & Young online tax calculators and rate tables are useful tools to help simplify the tax process, especially when trying to decide whether to invest in “registered” or “non-registered” investment options.

Join us for our upcoming free Wise Money Talks workshops. Register early as these events fill up fast!