Main Street Finance

Planning makes better investing

By Andrew

When residents of Main St are deciding how to begin the investing process, as we discussed previously, the first step is assessment. There are some important things that any potential investor needs to ask themselves first:

Making a Plan

The market moves up and down, and that volatility is what scares investors. Investing is not about buying when things are going up, and selling before going down. It’s not even about buying BEFORE things going up or selling BEFORE everything goes down (although that’s a great idea…).

One of the main keys is having a goal in mind. What are you saving for? Retirement? A house? Or boat or new car? Kids college fund? One of the main keys is for each investor to sit down BEFORE they begin and ask themselves some very important questions:

What am I saving for?
When will I need the savings (or when will I be using them)?
How do I feel about risk (we’ll cover this later)?
What are my priorities for investing (10 year anniversary trip to Italy is more important than speed boat – just an example, cause speed boats are pretty sweet)?
How much of my income can I devote/want to devote to this?

How Important is Risk?

Most of the above makes sense, with the exception of risk. Risk is a very important part of investing. Risk is correlated (remember!) to return. The more risk you take on, the greater the return.

Think of a casino vs savings account in the bank. A savings account is not risky. Even if the bank fails, the FDIC insures it. So, you receive very little in return (a few percentage points of interest). Now a casino is full of high risk and high reward. You can lose your money very easy, but can make a lot of money in return for that risk (just remember, the house always wins, and I am not advocating gambling in lieu of educated investing).

Think of Ocean’s 11, a great movie that teaches us a lot of lessons. The whole point of the movie is doing something risky in order to gain return.

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About Andrew

Andrew is a corporate finance consultant living in Los Angeles, specializing in distressed and bankrupt consulting. He helps clients review business plans and the general market and decide what steps to take next. He has a masters in finance. Andrew enjoys running and biking in the San Gabriel mountains, cheering for the San Francisco Giants and eating (but trying not to gain weight).