Four Steps to Take Before Investing in 2020

What's an investor to do?

The S&P 500 Index fell about 34% from its February peak to the market's March 23 bottom. Since then, it's back up about 58%.

Now, with markets hitting all-time highs again, you're probably wondering if it's a good time to be invested.

I'll share the answer to that question in a moment. But first, we have to address the most important prerequisites you must meet before putting any money to work in today's unusual market...

You see, investing in riskier assets like stocks and corporate bonds should never be the first step you take in building wealth and establishing financial freedom. It should be one of the last.

All investors – and I mean all – must go through these mission-critical preparatory steps first...

1. Clearly define your investment goals.

It seems so obvious, and yet most folks I speak with skip right over this first step. By and large, all investors are looking to do just three basic things...

  • Get wealthy.
  • Stay wealthy.
  • Generate steady, current income.

First, identify which of these goals are yours and then invest accordingly. Stocks, for example, can help you get wealthy... Hedges and hard assets can help you stay wealthy... And bonds and dividend investments can help you produce safe, steady income.

This next step is also an important part of choosing between these priorities...

2. Know your investment horizon.

The length of your investment horizon will have more of an impact on how you should be investing than you probably realize. Put simply, the shorter your horizon, the less risk you should take in your portfolio.

That's because assets with the highest return potential (like microcap stocks or extremely distressed debt) also tend to be the most volatile. Over the longer term – more than five years – these risky assets tend to outperform. But over shorter periods, they can massively underperform.

So if you only have a few years before you'll need the money, you'll have to reduce your risk and tilt more toward "stay wealthy" investments.

3. Understand your risk tolerance.

This step requires you to be completely honest with yourself.

Do you really have the temperament to stomach the extreme short-term losses that investing in risky assets will bring? If you're comfortable zig-zagging your way to big-but-volatile investment gains, invest in riskier assets. But if you prefer sleeping well at night, pick safer vehicles.

4. Clean up your "personal balance sheet."

This might be the most important prerequisite to investing. And yet countless folks with student loans and credit-card debts are avoiding it. In short, before you put real money into any stock or bond, you must first pay off your high-cost debt.

Given where markets and prevailing interest rates are today, I suggest you use this rule of thumb... List any and all debts you owe that carry an annual interest rate of 6% or more.

First, look to consolidate and refinance these debts to a rate below that threshold – rates for residential mortgages and home-equity loans have never been lower. But for those debts you cannot refinance, pay them off... before you buy even that fractional share of Apple (AAPL) you've been eyeing on your Robinhood trading app.

So what's an investor to do today? It largely depends on these four mission-critical steps – and where you stand on them.

If you're primarily looking to stay wealthy... if you have an investment horizon of less than five years... if you can't stomach big short-term losses... or if you currently owe debts with interest rates of 6% or more – you should not be investing in the stock market today. Full stop.

If you do have your financial house in order, now is a good time to invest – as long as you use caution.

Hold more protection and "rainy day" reserves than normal... And only buy the best kind of stocks. That means owning high-quality, rapidly growing companies with enduring franchises, talented management teams, and high returns on investment.

Good investing,

Austin Root

Further Reading

"When do you get back in after getting out?" Steve asks. After the crazy action in the market this year, it's one of the most important questions you can ask yourself. Make sure you've got a plan in place by reading his strategy right here: How to Know When to Get Back In.

"It's investing made easy," Dr. David "Doc" Eifrig writes. You'll want to have guidelines for deciding whether you want to buy any security. And Doc's simple formula will help you home in on winning stocks in no time... Read more here: The Five-Step Formula for Buying Winning Stocks.

Market Notes
ANOTHER E-COMMERCE WINNER FROM COVID-19

Today’s company is an unlikely winner from the pandemic-driven shift to e-commerce…

As we’ve covered before, COVID-19 has boosted online shopping in the past months as folks choose to shop from the comfort and safety of their homes. E-commerce companies like Wayfair (W) and MercadoLibre (MELI) have benefited as a result. Today’s company is riding this trend, too…

Chewy (CHWY) is a $28 billion online platform for all-things pet. Carrying more than 2,000 brands, Chewy offers products from pet food and treats to toys to beds. And with customers turning to online platforms to do their shopping during the pandemic, Chewy has reaped the benefits… In its most recent earnings, the company reported net sales of $1.62 billion for the first quarter, up 46% year over year. And it had positive adjusted EBITDA of $3.4 million for the first time.

CHWY is up more than 100% over the past year, recently hitting a new all-time high. And as the e-commerce trend accelerates, those gains should continue…