Okay, so you’ve heard about investing and want to give it a go. When is the time to start investing? If you read below you’ll find out exactly when and why.
When Not to Invest
There are certain points in life when you should not be investing. The most important one is arguably when you are in bad debt. This doesn’t include a mortgage, but includes other debts such as personal loans, car loans or credit card debt. Your number one priority in these situations should be to smash down these debts. The interest on these loans is definite, and to achieve returns in investing that outweigh this interest would be difficult or near impossible. As an example, if you have a credit card debt with an interest rate of 20%, your investments would need to also be getting a return of 20% just for you to break even. Unless you are an expert investor or very lucky, these returns consistently aren’t likely. So if you have any of these debts, focus on getting rid of them first before investing.
Another reason not to invest is if you will need the money sometime in the next five years. Investing is for the long term, and the shorter you keep your investments the more risky they are. So if you have a house deposit that you are wanting to deploy in the next 1-4 years, keep that baby safe in the bank. It might seem tempting to put your deposit into the share market as the returns are much higher than the bank, however if there is a downturn when you are trying to withdraw it you could have much less than what you started with.
Lets use an example.
You had $50,000 in the Vanguard Australian Shares ETF (ASX top 300) at the start of February 2020. The market had a good year in 2019 and had a good start to 2020, so your initial investment would have grown. You would be feeling pretty good with $50K as a deposit and you found a house you liked, planning to withdraw that money at the start of April to buy a home. Then Coronavirus hit, and it hit hard. The 20th February 2020 signified the start of the biggest stock market downturn since the global financial crisis in 2008. Suddenly your $50k deposit at the start of February is now worth only $36k at the end of March. You have lost $14k in a month, with the plan to withdraw that to buy a house at the start of April.
This is obviously an extreme example, and these massive market crashes tend to only happen once every 10 years or so, however it does teach an important lesson. If you plan to use the money in the short term keep it safe. If you aren’t in need of the money, then its worth investing. By looking at the graphs above you will see that the market bounced back really quickly and today we are already at all time highs.
When to Invest
Once you have all your debt cleared, you have an emergency fund, and you have some money left that you don’t need in the immediate future, you are ready to invest! To get started you will need to find a broker and find some investments that interest you. There will be more posts in the upcoming weeks explaining how to choose a broker and get started. However, if you feel like you want to get started ASAP please email me at email@example.com or DM me on Instagram @mind_over_money_ and I’d be happy to get you started.