Last Updated on April 9, 2022 by Rat Race Running
I’ve recently encountered a concern regarding stressful investments after sharing my previous blog post that you should not have more than P120K in the bank.
To clarify, the P120K is only a placeholder for the emergency fund you computed. If you have calculated that P10K for three months is enough, you only need P30K in the bank.
There may be a misconception in the post that you don’t have to save anymore. Instead, I would like to reiterate that the rest of the savings should be in some form of investment.
The investment should also be compatible with you and your needs and not just because of the hype, so you can avoid getting stressed. So, if you’re stressed with your investment, there are many possible reasons why. Here are five things that I think you need to reconsider with your investments:
1. You think that your investments’ profits are guaranteed.
Any honest investment advisor would never guarantee a profit. They can only provide the potential profits based on an investment’s historical performance.
For example, PAG-IBIG MP2 has been one of the trending investments in the past few years because of its high dividend yields. But if you’ll notice, this investment don’t gives guarantees on how much dividend they will give.
Another investment is index mutual funds. It is a collection of assets, typically stocks. The price of the mutual fund will go up or down relative to the general movement of the stock market. So, the usual 5-10% annual market return narrative is only based on historical data.
Another reminder is to be very careful and skeptical of anyone offering a guaranteed profit from investments, especially in the financial markets like stocks and crypto.
You may also read this post to identify if your investment is a scam.
2. Your investment does not match your risk appetite.
Your risk appetite determines how much risk an investor can tolerate and stomach. Your risk appetite will also suggest which investment is best for your personality.
For example, suppose you are a low-risk (conservative) person. In that case, it will be very stressful for you if you invest in the crypto market because of its high volatility and uncertainty. Likewise, suppose you are a high-risk (aggressive) individual. In that case, investing in money markets or bond markets will be very dull.
Remember that risk and reward are directly proportional. So, it’s either high risk, high reward, or low risk, low reward. There are generally three risk appetites, from low risk to high risk:
Conservative Risk Appetite. Investors prefer very low market volatility or almost guaranteed returns in their portfolio, even if they are low rewards. Investors with a conservative risk appetite may invest in money market funds, bond funds, or time deposits.
Aggressive Risk Appetite. Investors who eat volatility for breakfast. They prefer high-risk investments because of the high possible reward. Investors with an aggressive risk appetite may invest in equity funds and crypto markets.
Moderate Risk Appetite. Investors prefer the best of both worlds in terms of risks and rewards. Moderate risk investors can build a portfolio with a combination of high-risk investments like stocks and low-risk investments like bonds. There are also investments called balanced funds that include both stocks and bonds.
You may test your risk appetite through this calculator.
3. You’re investing the money you need.
One of the biggest and most costly mistakes any investor can make is to invest the money you need to pay your bills and put food on the table.
During the last bull run, many people made money because of the relatively easy market. They thought they had what it takes to be full-time traders, so they quit their day jobs. Unfortunately, the bull market ended, and the bear market began.
Since many were unequipped to handle the volatility and slow growth of the bear market, they were not earning enough to support their basic needs, so many decided to return to their old jobs.
This is an important lesson to understand. If you’re investing your grocery, utilities, and rent money, you are putting yourself and your family in danger.
Also, you must avoid borrowing money to use as your investment capital.
4. Your time horizon does not match your investment.
Your time horizon is as essential as your risk tolerance. It will dictate which investment is most appropriate for your investment goal and age.
For instance, if you’re planning to marry in two years, you should not invest your marriage fund in volatile markets like crypto or speculative stocks. Investing in high-risk funds is not in line with your investment goal. The more appropriate investment will be in high-interest savings or short-term time deposit funds for capital preservation.
Another example is if you’re 25 years old and saving for your retirement at 45. It would not be appropriate to invest in low-risk investments like bonds or money market funds because you will not be able to maximize the advantage of starting early. The better investment would be in higher-risk investments like the growth stock or dividend stocks.
Generally, there are three investing time horizons:
Short term – less than one year. You should invest in low-risk products like bond funds, money market funds, time deposits, or high-interest savings accounts. This will preserve your investment capital.
Medium-term – one year to five years. The best investment vehicle is the balanced fund. Since it is a moderate risk, your capital will be invested in a combination of low-risk (bonds) and high-risk (stocks) investment vehicles.
Long-term – more than five years. The best investment is in equity funds like the stock market. The time component will normalize the high risk. The longer you invest, the safer the stock market gets.
5. You don’t fully understand your investment.
The biggest reason people would be stressed over their investment is that they may not fully understand where they are invested. They may have just been enticed by friends or family members who posted on social media about a new shiny product that supposedly offers guaranteed returns.
It is also essential to know the red flags that may indicate if an investment is a scam. You may read a previous post here.
It is essential to know your investment goal, risk appetite, your time horizon, the ins and outs of the investment, and other related factors. Study and learn as much as possible before putting in your hard-earned money.
Investing can be an easy or stressful situation depending on the investor, so it is essential to understand where you’re invested first.
Try to find online resources, social media groups, and mentors to guide you in starting. Investing and money matters will reveal many things about yourself.
Featured image drawn by: cRAY.z Random
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