Div Prakash

Disclaimer:
I am not a financial adviser. You should consider seeking independent legal, financial, or other advice to determine how the information in this post relates to your unique circumstances.
I am not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this website.

In order to avoid emotional decisions or decisions made under duress, it is important to define an exit strategy for each financial position ahead of time. This idea can also be extended to non-financial aspects of life; a diet, workout, relationship etc.

Let’s start by defining what I mean by an ‘Exit Strategy’ (I have my own definition that is not completely linked to the accepted financial definition). For me an exit strategy for a given decision consists of; a trigger or threshold and a corresponding action to be taken. Each decision can have multiple Trigger/Action pairs. As an example:

Decision: I want to keep my hand under hot water
Exit Strategy:

• Pair A – Threshold Reached (Pain threshold reached):
  • Trigger: Body tells me the water is too hot and will cause burning
  • Action: Move hand out of water
• Pair B – Time-based (20 seconds elapsed):
  • Trigger: Time has elapsed by 20 seconds
  • Action: Move hand out of water

Following this simple structure, at least one Trigger/Action pair should be defined for each Exit Strategy from a major decision.

All or Nothing?

Exit Strategies do not need be an all or nothing affair. Partial exits can be defined as part of an action. We’ll use a financial example to demonstrate this:

Decision: Invest $10,000 to purchase 1,000 shares at $10 per share in new technology company XYZ.Co
Exit Strategy:

• Pair A – Threshold Reached (Share Price = $15):
  • Trigger: Share Price reached $15
  • Action: Sell 500 shares at $15 for $7,500. Retain remaining 500 shares. Revise Exit Strategy.
• Pair B – Time-based (2 years elapsed):
  • Trigger: Time has elapsed by 2 years
  • Action: Sell 250 shares at current price. Retain remaining 750 shares. Revise Exit Strategy

Revision of Exit Strategy

Although we define our Exit Strategy upfront to avoid future emotional decisions or decisions made under duress, that does not mean the Exit Strategy per decision is static. The Trigger/Action pairs need to be revised based on the nature of the decision and every time one or more Trigger/Action pairs are executed. As a rule of thumb, long-term decisions should have fewer revisions than short-term decisions.

If you are finding you are revising Exit Strategies too often, then perhaps you have not created clear and comprehensive Trigger/Action pairs. The first few times you encounter a Trigger you will be confronted and this is when you are most tested. It will take honesty and courage to determine your course of action; commit to your previously defined Exit Strategy or decide that there is significant new information to allow deviation. The reasons to do so however should never be emotional or under duress.

Disclaimer:
I am not a financial adviser. You should consider seeking independent legal, financial, or other advice to determine how the information in this post relates to your unique circumstances.
I am not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this website.

In this post I will cover the fundamentals you should know to get started with investing! We’ll cover:

• What is investing?
• Why start investing?
• What is asset allocation and why does it matter to manage risk?
• How do I start?

What is investing?

Investing is the process of putting money into an asset (classes of assets include shares, property, cash, bonds etc.) with the expectation of achieving a profit. I would add a few additional considerations when talking about investing to friends and family in order to differentiate it from trading and gambling.

I consider investing to be an activity that is informed and viewed over a long-term time horizon. Trading is also informed but the frequency is higher and targets short-term gains. Gambling is entirely risk-based with little or no impact to be had by being informed.

Personally, when I consider an investment I generally target 3+ years before reaching the outcome I anticipate based on the information I have when making my investment decisions. If you wish to have short-term returns and more frequent trading, this is not the post for you.

Why start investing?

Investing provides a means to grow your net wealth more than simply interest on your cash in the bank and trading your time for money through your job. There are of course no free lunches and this increased opportunity for growth has a trade-off; higher risk. More on this when we talk about asset allocation.

Investing is also a great way to build a better understanding of how money, companies and economies work. Learning more about investing is an important part of increasing your financial literacy and making better financial decisions.

How much should I invest?

This is a difficult question to answer as it differs for everyone. If you are unsure, you should consult a financial advisor for guidance. When helping my friends and family I strongly recommend starting small. Whether we like it or not, we have an emotional connection to money. Gaining it feels good and losing it feels terrible. For those new to investing you have to learn to manage your emotions in both cases. Starting small lets you learn about yourself and how to relate to increases and decreases in the value of your investments without playing with too much of your wealth.

I only suggest my friends and family start investing once they are financially stable which for me means; no major debt (credit cards, car loans, personal loans etc.), positive cash flow (you earn more than you spend), even cash savings to cover at least 6 months expenses if you lost your source of income. If all of that is covered, then I suggest putting aside between $2,000 and $10,000 to start investing.

What is asset allocation and why does it matter to manage risk?

I mentioned earlier than while investing provides an increased opportunity for growth it comes with the trade-off of higher risk. Generally speaking, the greater the growth opportunity, the greater the risk (not always true but is a simple rule of thumb when you’re getting started). Each type of asset class has it’s own risks and specific assets within those have their own risks too.
The most common asset classes to consider when starting investing are:

• Shares – issued by corporations where each share (or sometimes called stocks) represents ownership of a % of the company or sometimes called stocks). These are traded on share markets around the world such as the ASX (Australian Securities Exchange) in Australia.
• Property – owning physical property as as a house or a warehouse, generally purchased through private sales between individuals.
• Cash – the money represented by currency in which we are paid or use to purchases goods and services. Generally stored in a bank account for those you want to earn interest.
• Bonds – issued by governments and corporations when they want to raise money. By buying a bond, you’re giving the issuer a loan, and they agree to pay you back the face value of the loan on a specific date, and to pay you periodic interest

Note: Recently cryptocurrency and blockchain tokens have been increasing in popularity. While I have invested in this asset class it will not be included in this post. I will write another soon tackling how to get started with crypto.

Asset allocation is the process of deciding how to distribute your investments across the asset classes to achieve the desired balance between growth opportunity and risk. This is sometimes also referred to as portfolio diversification. If you live in Australia and have superannuation (401k or retirement fund in other countries) you have seen that they will offer you different “investment strategies” with names such as ‘Balanced’, ‘Diversified’ or ‘Growth’. These are essentially referring to different asset allocation strategies which they will use when managing your superannuation funds.

In the next section, we’ll bring this all together by giving you a great starting point to start investing and learn how this all works together.

How do I start?

This is the question I get the most often. Often people want to get involved but aren’t sure where to begin. Between reading the acronyms for all the shares, the graphs, and forms to fill it can seem overwhelming. Thankfully starting with investing today is a lot simpler than it was even 5 years ago. There are new technologies and products available that help new investors begin with low upfront investments required, low fees and easy to use tools.

For my friends and family I recommend starting with a well-regarded online investment manager. In the USA Wealthfront is one of the market leaders. In Australia, I use Stockspot but there are others and I suggest doing your research.

Note: If you do choose to use Stockspot, we would both receive a waiver on the management fees for the first $5,000 invested if you use my invite code DIVYEPRA. You have no obligation to do so but it would save us both a few dollars a month!

Services like Stockspot allow you to deposit money into your account and they will create a portfolio with suitable asset allocation based on your risk profile. As your assets increase or decrease in value, they will rebalance your portfolio to keep it in line with your risk profile too.

As a starting point, I suggest using Stockspot or a similar service until you become more comfortable with buying specific shares and assets yourself. I continue to use Stockspot for a significant portion of my portfolio in conjunction with specific asset purchases outside of Stockspot.

I hope this helps and if you have any feedback or questions please feel free to send them through!