Amidst the recent uncertainty and turmoil of the global financial markets, many investors have been left wondering if this is still a good time to look for investment opportunities. As with everything in life, there are two sides to the same story.
On the one hand, the economic turmoil could be taken as a clear sign to rush out and away from the market. The rationale behind this move is the belief that it is better to be safe than sorry, and that a dollar saved is a dollar earned. We see such a reaction in the form of panic-selling, when risk-adverse investors take to their heels at the slightest sign of trouble.
There are, however, those who believe that an economic turmoil is a signal for them to work their way in, following the belief that crises are often opportunities in disguise. It is in times of uncertainty that the “gems” are sold at a discount, and buying when others are selling allows one to gain a tremendous profit when the market recovers over time. For such investors, the key to tapping into this uncertain market lies in identifying when the market will turn, and what the right investment instrument will be.
What most people forget, however, is to ask whether you are even in a position to invest. The basic questions: “Are you financially ready to invest?”, “How do you determine if you are financially ready to invest?” and “ What have you done so far to gauge your financial readiness?” are furthest from their minds.
How To Determine If You Are Financially Ready
Determining your financial readiness is not merely estimating how much you have in your bank accounts. There are 3 barometers of financial health that you will have to check yourself against: Personal Income and Expenses Statement, Personal Net Worth Statement and Financial Ratios.
Only when you systematically review your finances in greater detail will you be aware of your readiness to invest in the future. Let us go through the 3 barometers so you will be more aware of what they are and how they can give you an idea of your where you are financially.
How Much Do You Earn And Spend?
Firstly, in order to establish your financial standing before you start any investment, you should be able to keep a good track of the money entering and leaving your wallet.
You can achieve this through a personal income and expenses statement, a tabulation of your monthly income and expenses. Income is classified under money inflow, while expense is categorised under money outflow. Besides your salary, income can also be drawn from sources like: interest from deposits, rent from real estate or dividends from investments. Expenses are what you spend on that eliminates money from your pockets. Examples of expenses are: car loans and utility payments, travel and entertainment costs and credit card payments.
Someone who is financially sound will have greater money inflow than outflow – when you choose to invest, you are creating an income stream that can serve you in the future.
With that said, it is important that you keep tabs on your income and expenses statement at every point of your life to ensure that you are not on the wrong track of your finances.
How Much Are You Worth?
The next step in determining your financial readiness is to identify your assets and liabilities and compile them in a Personal Net Worth Statement.
This statement shows you whether you are a positive net worth individual with many assets or whether you are a negative worth individual, one who is bagged down by liabilities in life. An asset puts money in your wallet while a liability removes them from it. Examples of assets are: cash, stocks, bonds, bank balances and net value of businesses you own.
Do take note that in your Personal Net Worth statement, you should always indicate the ‘realised value’ – how much you will gain when you sell your assets in the future, and not their ‘paper value’ just to make your statement looks better.
On the other hand, examples of liabilities are: taxes, car loans, mortgages and credit card balances due. Now that you know what assets and liabilities are, you can use them to find out your Net Worth. Net Worth, or your True Wealth is the difference between assets and liabilities.
If you aim to have an increasing Net Worth over the years, you must ensure that your assets are growing faster than your liabilities – and not the other way round.
Finally, to really gauge whether you are financially ready, you must understand important financial ratios that will aid you in seeing the bigger picture of your financial health.
Some of the things they will be able to expose are: how many months you can survive when you lose your income, whether your overall net worth is hugely liquid or illiquid, whether you over leveraged, how much are banks willing to loan to you, whether your assets are income-producing and whether you able to withstand a fall in asset value and yet remain solvent during a crisis.
As an investor, you must know your financial ratios well as they will expose the areas you will need to improve on financially. You will then be able to work on them first and be more financially equipped before going ahead with your investments.
How We Can Assist
At this point, after going through the three different barometers of financial health above, you would probably find it easier to answer when someone asks you: “Are you financially ready to invest at this point of your life?”
For those who have checked against the various barometers and are indeed all geared up and steady financially, it is now the time to enter into investments and grow your wealth, crisis or no crisis.
Our team of advisers at SingCapital Pte Ltd would be more than willing to give you personalised advice along your investment journey, and share with you information on investment vehicles you can invest in, like bonds, equities and properties.
Author: Alfred Chia
Courtesy of The Straits Times