Thread by @itsKostasOnFIRE

The 4 Decisions You Need To Make Before Investing

No 4 is what 99% of investors get wrong

/THREAD/

1. Financial goal

You need to determine your end goal with investing

• Is it to buy a house?
• Is it to send your kids to college?
• Is it to retire early and become financially free?

You need to calculate a specific number of desired funds in your portfolio

Do you want to rely on these funds for retirement income?

Then, use the 4% rule to calculate how much money you need to accumulate in order to become financially free and retire early

You simply calculate your annual expenses adjusted for inflation

And you multiply by 25

That way you withdraw 4% of your funds per year and never run out of money in retirement

If you want to learn more about how to calculate your FIRE number see this thread below

https://twitter.com/itsKostasOnFIRE/status/1347165405928972290?s=20

2. Time horizon

When do you want this money?

If it's a few years from now, you should not invest it

The short-term market movements are very unpredictable

You do not want to have a sudden 30-40% downturn right before you need the money

If it's 5-10 years from now, you should invest in relatively safe investments

Have a higher allocation into income-producing assets

• Real estate or REITs
• Dividend stocks
• Bonds

Are you a young investor with a time horizon several decades from now?

Then you invest in companies with higher growth prospects

They may not pay you now via dividends or interest

But they may be dividend payers 20-30 years from now

3. Involvement

How much time are you willing to devote every week for your investments?

If you don't have the time or interest you should stick with

• Index funds
• Bond funds
• REITs
• ETFs

If you are willing to devote 8-10 hours every week to study

• Financial statements
• Management interviews
• Earnings calls and company statements
• Analyst reports for the company and industry

You can allocate a portion of your funds to individual stocks

4. Risk tolerance

Everyone is a long-term investor in a bull market when stocks go up

And then 99% of them panic sell their stocks on the first 20-30% drop

If you cannot stomach volatility and short-term drawdowns you should stay out of the market

High-growth stocks may give huge returns but they come at a cost

Even holding stocks like Apple and Amazon for years means you will have to endure several drawdowns of 20-30-40% along the way

Volatility is the price you pay for holding high-growth and high-quality stocks

To summarize:

1. Financial goal
2. Time horizon
3. Involvement
4. Risk tolerance

You need to decide what these 4 factors are before you go into investing

Otherwise, there may be many unfortunate surprises along the way

/END/

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