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A lot of people want to start investing – but not all of them end up doing so. There are a variety of reasons for that. Maybe it is a lack of time, or some people may want to wait until they have more money to spare.
But whatever the reason, the longer the period to start investing, the greater the likelihood I see that it may never happen. Putting something off can become a habit.
That said, rushing into the stock market without taking certain steps first can also be a bad idea. Here are three things I think it helps to decide before you start investing.
1. How much can you spare?
I mentioned that some people put off investing because they think they do not have enough money. In fact, one of the things I like about investing in the stock market is how flexible it is. There is an approach that can work for almost any budget.
But while people start investing hoping to build wealth, there is a risk that the opposite happens. So I think it makes sense to assess how much an investor can realistically spare.
2. What do you hope to achieve?
Building wealth may sound good but there are different ways to try and go about that. Some people are in a hurry, while others take a long-term approach. One investor may focus on earning dividends, while another may hope to capture share price gains as a company grows. Others mix both growth and income shares in their portfolio.
There is no single right approach, but I think it is helpful to define an objective when you start investing. That can change, but knowing what you are aiming for makes it easier to decide how to try and get there.
3. What’s your plan if a share you own falls instead of rises?
Sometimes, things work out differently to our expectations – for better or for worse. It can therefore be helpful to decide rationally ahead of time what to do when that happens.
For example, say you buy a share expecting it to increase in value, but it falls. Do you sell to limit your losses (for example with what is known as a stop loss order)? Do you do nothing and wait in hope of a price recovery? Do you pounce on a lower price as an opportunity to buy more?
Deciding your investing approach rationally can help take the emotions out of challenging situations.
An example from my own investing
As a real-life illustration, take my investment this year in US food and beverage producer Campbell’s (NASDAQ: CPB). I liked the company’s strong brands and felt the share price looked cheap – plus it had a juicy dividend. But the share price has fallen even lower — and the company has cut its dividend!
As I have a sizeable position, I have decided not to buy more shares. But I also have not sold them (even though the dividend cut annoyed me).
Why? The dividend yield was so high before and it still looks attractive even after the cut. The company’s brand portfolio also remains powerful.
I do recognise the risk that weakening consumer confidence could hurt sales of premium packaged consumer goods. But as a long-term investor, I continue to believe that the firm’s brand strength is more valuable than the current share price suggests.
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Christopher Ruane owns shares in Campbell’s.
This story originally appeared on Motley Fool
