3 Questions to Ask Before You Invest in Stocks
If you feel uncomfortable every time stock prices fluctuate wildly, or if you feel distressed seeing you’ve lost money, or if you feel the urge to sell just because everyone is selling, you probably should review the basics of investing.
Why? Because stock market investing may NOT be for you.
You should know that stock markets regularly suffer from periods of bloodbath, with market reversals occurring after periods of bullish trading.
If you want to assess if you are fit to invest in stocks, ask yourself these three (3) questions.
1. What’s my investment objective?
You must first identify what your investment objective really is. Determining the reason why you’re investing in the first place can properly match you to the asset you should be investing in.
Your investment objective may be any of the following:
1. Capital Preservation. This is the most conservative strategy and the primary goal of “capital preservation” is to prevent loss of capital.
2. Current Income. “Current income” is the strategy of getting the fastest return on one’s investment. The return does not have to be extremely high; just enough to produce a level of income that can cover one’s living expenses on a regular basis.
3. Capital Appreciation. If you want to grow your capital, this can be described as “capital appreciation”. The ultimate goal is to produce a high level of return that would increase your money, but do note that this strategy also entails higher risk of loss.
4. Total Return. “Total return” is the goal of growing your capital through both capital appreciation and reinvestment of that appreciation.
You should see by now that if “#1 – Capital Preservation” is your investment goal, then stock market investing is NOT for you. Since you are afraid of losing money (which happens in the stock market) and you simply want to “preserve” your capital, then stocks are not the appropriate investment for you.
You may choose to invest in stocks only if your goal is Current Income, Total Return, or Capital Appreciation.
2. What investments match my investment objective?
If your investment objective is Capital Preservation, ideal investment options for you could be time deposits, low-yielding bonds, money market funds, and other similar assets with low risk. These assets are relatively safe and can help protect one’s capital. Stocks, with their inherent risky characteristic, are not for you since losses could happen in stock investing.
If your goal is Current Income, your options are stocks, especially dividend-paying stocks. The dividend payments from these stocks can help cover your living expenses on a regular basis.
(A listing of Philippine Stock Exchange index (PSEi) stocks and their dividend payout ratios are in the article List of Dividend Paying Stocks in the Philippines.)
If your goal is Capital Appreciation or Total Return, stocks in general may be the appropriate investment option for you. They provide a high level of return that usually exceed that of the inflation rate and may, indeed, grow one’s capital exponentially.
3. What’s my tolerance for losses?
Basically, you have to assess if you have a high tolerance for losses. That means asking yourself how much level of losses you can comfortably take.
For example, if you invested P50,000 in stocks and your current portfolio is losing and is now valued at P38,000 — a P12,000 loss which can surely happen! — will you panic, feel distraught, or simply chill?
Assess your own tolerance for risk. Stocks are high-risk, high-yield investment instruments. This means that although there exists a potentially high level of income, it also comes with the possibility of capital losses.
In stock investing, there is no guarantee that your capital will be protected. You can lose money.
So to reiterate: If you feel uncomfortable every time stock market prices fluctuate wildly, or if you feel distressed seeing you’ve lost money, or if you have the urge to sell just because everyone is selling, you probably should NOT invest in stocks.
Hope that helps. Happy smart investing!
Read these other related, useful articles:
- Why People Lose Money in Stocks: The Emotional Cycle of Stock Investing
- Tutorial and Guide on Stock Trading
- FREE Stock Picks, Target Prices and Broker Recommendations
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