Luke Harris says investors need to have emotional, educational and financial readiness in order to have a successful, long term invest strategy.
While the ultimate purpose of investing is to build wealth, embarking on this journey with the sole mindset of ‘wanting to make money’ without a sustainable strategy in place could be your downfall.
According to active investor and author Luke Harris, investment success comes from understanding your goals and how to achieve them, building upon your knowledge and developing the right habits.
Because of this, people need to reflect on whether they are truly ready to invest. And this ‘readiness’ comes down to three stages – emotional, educational and financial.
“A lot of people wrongly assume that you just need money, and if you’ve got money then you can become an investor. But it’s really about stacking the odds in your favour, and to stack the odds in your favour we need to understand that there are three different stages of readiness,” Luke told KnowHow founder Bushy Martin on the Get Invested podcast.
Luke said the first stage, emotional readiness, is about understanding your reasons and goals.
“You need to be emotionally ready to invest. And when we say the reasons why you’re investing, it’s not just to make money. Everybody would love to just go and make some money, but it’s understanding the real goals behind it. And I link that to the dream, the dates and the dollars,” he said.
“It’s about knowing the dream and the goals in detail, knowing exactly what you want. It’s about being clear on the dream, the date you want to achieve it and the amount of dollars you actually need for that. And that all comes back down to that emotional readiness of understanding why you’re doing it.
“It also comes down to understanding delayed gratification and understanding how that can impact you. It’s understanding how maybe you need to cut off your Netflix subscription for 12 months and maybe you need to read some books instead. Maybe you need to get the emotional side of your thinking in order before you put your money into the marketplace. And there might be 12 months before you invest.”
In order to understand your emotional readiness, Luke said you need to be brutally honest with yourself and ask the right questions.
“I always say to people, on a scale of 1 to 10 how emotionally ready do you think you are to invest? And it’s often the first time people have been asked that question in their lives. And so when people are actually forced to think about it, it really makes them sit back and go, ‘wow maybe I’m a five or almost six’. Well, why not a 10? What do you think it’s going to take to get you to a ten? So getting that emotional readiness is really key,” Luke said.
The second stage is to have educational readiness, which is something many experts will advise of investors in all stages of their journey.
“You need to make sure that you’ve got some education behind you before you go and put your money in the marketplace. You need to understand the fundamentals of the investment that you’re putting your money into and understand that you need to have some knowledge of finance and some knowledge of tax,” Luke said.
“You need to have some knowledge of the ways that you’re going to build this portfolio from an education perspective, and also understand why certain investments work better than others. You understand your tax situation, why a new property might actually help you for the long term because of the depreciation and tax benefits, and just getting that general understanding of property.
“And as most investors that are just starting out, I ask ‘what’s your education on property like on a scale of 1 to 10?’ They vary anywhere from one to two to eight, but I rarely get a nine or a 10. So there’s often work to be done.”
To articulate the consequences of not being emotionally and educationally ready, Luke talked about his own investing mistakes.
“I bought a lot of property and did a lot of things the wrong way during my twenties. And I guess that’s part of that naivety that I was just going out there to to give it a go. I wanted to make money in property. But really looking back at it, I could have done things a lot differently,” Luke revealed.
“I would go out there and I was jumping from one thing to the next, and I was doing that because … I didn’t have any guidance to really direct me as to what to do next and in what order. And like a lot of people, to a certain extent, I relied on my advisors to tell me what to do when they weren’t really engaged for that purpose. And so through the journey, I would do one thing based on what the media was saying or based on property books. Webinars weren’t around and podcasts certainly weren’t around, but I’d use anything that I could get my hands on.
“And so I was zigzagging through my portfolio, trying to find stuff that I thought were good investments and making decisions that I thought were the best at the time but didn’t really fit into a long term plan.”
The third stage is to be financially ready to invest.
“That doesn’t mean just having a deposit or just having a pre-approval or a borrowing capacity from a lender. It means really having good money habits and a really understanding about how you behave with money. It’s looking at how you navigate through when you get a paycheck every week or when you get your business income – what do you do with it and how good are you with paying your debts? And have you defaulted? Do you understand your credit file? All of these things sort of come into the financial readiness,” he said.
Listen to the Part 2 of the interview here.
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