Here at Sabio Books, we talk about the best books for entrepreneurs, business owners and investors. Today we turn to the investing side of the coin. I want to share with you, in this series of articles, the pieces of investing advice that I wish I had known when I first started investing. Through the blessing of time, I have learned just how valuable they are. The investing advice that I share with you comes from my favorite books on the topic of investing, but more so from my own experience putting these investing principles into practice. Each one of the investing tips we talk about, if you apply them rigorously, can vastly increase your success. Use them all, and your portfolio of investments will, I expect, benefit tremendously.
Even more importantly than all that, the investing advice we discuss will help you reach your goal of not just being a great investor, but living the life that comes with having made great investment decisions. A life, I suspect, that is defined by freedom.
Lesson 1 – The Best Offense For Investors is a Great Defense.
This lesson is an easy one to grasp for the sports fans reading this article. A team, an athlete, and, in our case, investors, can be aggressive offensively if they know that their defense is there to protect them. Like a team that goes on the offensive timidly because of hesitations about their weak defense, investors who fail to invest confidently or while looking over their proverbial shoulder also often struggle.
As investors, we have two principle defensive measures that we all must implement. These are (1) well-managed finances and (2) a sturdy financial education. Once these defenses are soundly in place, then as investors we can take the calculated risks that come with investing without fear or hesitation, and get the rewards of doing so that we are all after.
Managing Your Finances to Be a Great Investor
Simply stated, if you are in a sound financial position, you can take the risks that come with investing without fear about whether you are going to be able to pay your bills or handle all your obligations. A sound financial position for us means a great ratio of expenses to income.
If your income substantially outweighs your expenses, then you should have no problem paying all of your expenses and still have money left over to invest that you can invest without fear of loss. If those investments do not go as planned, then you at least know that you have enough income coming in to cover expenses. We tend to make better investment decisions, and decisions in general, when we can make them calmly. A big part of being able to invest calmly and strategically is knowing that you have the unavoidable costs of life easily covered.
Digging in a bit deeper, having a high ratio of income to expenses is important for the following reasons. First, if you have a high expense to income ratio, it will likely be challenging for you to save enough cash to make meaningful investments. The more money that you have to invest means that you should be able to accelerate your path to your goals. Further, with a high expense to income ratio, you will always be a timid investor.
Think about it. If you are up to your neck in expenses and debt, are you likely to ever have the freedom to take the calculated risks necessary to succeed as an investor? Good investors are not those who are also wondering whether their investment means their bills might not get paid! You need to lower your debt and expenses in comparison to your income so that you are free to take the risks that come with investing without fear.
So what does this mean practically? Your options are to lower expenses or raise income. The greater the separation becomes between expenses and income, the more income you should have to invest and, with that, the time it takes for you to reach your financial and life objectives should theoretically decrease.
Mentally, and speaking from experience, this is also the way to go. People delay for years the lives that they really want because they get so caught up in acquiring things that often only serve to add to their load of expenses. Make things easier on yourself so that you can find true prosperity in life.
Building Your Financial Intelligence
The next critical component of playing great defense so that you can strike when opportunities appear is building your financial genius. Making another sports analogy, great investors like the best athletes, know where the ball is going. Like a linebacker with the ability to, without hesitation, jump a quarterback´s pass because he has seen it over and over in preparation, great investors educate themselves so they can jump on great opportunities to grow their wealth. If you have to hesitate, opportunities are likely to pass you by.
If you do not take the time to educate yourself and build your financial genius, then you are betting, not investing. I know, and I could go on for days about how underserved many of us were with respect to building a financial education in schools and throughout our educational process. But, that is a topic for another day. What is important for us here is that we know that no matter where we are on our journey as investors, the one thing that will give us the greatest ability to go on the offensive is a strong financial education. This often means self-educating ourselves through great books and other resources. Taking the time to do so will be the biggest payoff and greatest investment you will ever make.
You have to know what you are investing in. You must educate yourself on the asset class. You must build your financial intelligence. Failing to do so is not playing good defense, and it could take you out of the game quickly if you fail to invest wisely.
The best way to conclude this article, and an easy takeaway for you: Remember that defense wins championships.
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