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Critical thinking for making investment decisions

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Manage episode 317134517 series 2148531
תוכן מסופק על ידי Finance & Fury Podcast. כל תוכן הפודקאסטים כולל פרקים, גרפיקה ותיאורי פודקאסטים מועלים ומסופקים ישירות על ידי Finance & Fury Podcast או שותף פלטפורמת הפודקאסט שלו. אם אתה מאמין שמישהו משתמש ביצירה שלך המוגנת בזכויות יוצרים ללא רשותך, אתה יכול לעקוב אחר התהליך המתואר כאן https://he.player.fm/legal.

Welcome to Finance and Fury. Sorry for the break over the past two months – been busy with moving into our newly built place – been in a process of trying to clear out lantana and fallen trees from 5,000sm – that combined with helping take care of my daughter and the excess work in a led up to the end of the year I didn’t have time to get an episode out – sorry – all weak excuses aside – in this episode – We will go through Critical thinking for making investment decisions to make 2022 your best year yet

This is a great episode to start off 2022 – as this can become your most powerful ability to make correct decision when it comes to where to allocate your finite resources – everyone on earth has finite resources financially – even Jeff Bezos or Elon Musk has only so many billions they can spend – this is a massive amount – but without creating more – if they spend it all the money runs out –

  1. Your individual ability to maximise your wealth - Is based around your ability to decern the correct financial decisions to make time and time again – making just one decision, or getting lucky once often isn’t enough to help maximise your wealth in the long term – can help in the short term – but over a long period of time, such as 20-30 years, you will make many decisions – each of these can compound off one another or they can result in set backs
    1. the aim of this episode is to try and teach a method of critical thinking
    2. not only can this be applied to this year to help work towards your financial goals – but for the rest of your life – in every area of your personal life when making a decision – when applied correctly – you will become a master of critical thinking
  2. What we will discuss is a process that helps to make a decision based around your personal situation that will equate to the best outcome for your as an individual – hence – this can be the most powerful tools in your arsenal – if you have the ability to make more correct decisions, over time, the further the compounding effects start to accelerate your life outcomes – those previous decisions become a compounding outcome the more of them you make
  3. Thinking critically isn’t taught – but it is something that we all have the ability to do
    1. We are all born as critical thinkers but this is beaten out of us from an early age – especially through institutionalised schooling – we don’t think but learn to absorb and regurgitate information
      1. Kids are in a constant state of learning – which is why they ask ‘why’ so often – they are trying to learn
    2. In high school – how many times do you ask the question “why” or “how” something works the way it does – most assessment is to get as high a score as possible on a rubric grading system and you get a grade from A to F, or out of 100 – so you lean how to get a high score without critically thinking about the assessment
    3. But it is never too late to start critically thinking

3 Steps to critical thinking – Identify the correct question, evaluate and then make a decision

  1. at its core - The solution to critical thinking is really four simple words: Why, does, how and what? These are four simple words that help anyone to develop their critical thinking skills in all areas of life
    1. The key to thinking critically about investments – or anything in reality – is this skill that can be applied to any area of your life – which requires you to think about things – the only way to really think about something is to ask yourself the correct questions, then evaluate these – helping you to narrow down to the correct decision
      1. The very nature of understanding a question comes in the form of understanding the answer – but many of us have no idea about the answer to our own questions
    2. Sure – you can sit back and have someone else spit information at you – which you can blindly follow – but this isn’t critical thinking – it is being told what to do and following without a fuss – but this can lead you down the wrong path

Critical thinking is important – allows you to come to the correct conclusion for your own situations

  1. Taking a step back and looking at my own personal experience when it comes to initial meeting with clients - Most people I have met don’t think about the investment itself and if it is best option for them – they simply want to invest into an asset class because they have heard of others doing it – i.e. their critical thinking around making a decision is that others have done it – i.e. monkey see monkey do – is this real critical thinking?
    1. Some examples – Someone in their mid-60s who is looking to retire in the next few years purchases an investment property that is leveraged at 80% because they went to a seminar about property investment
      1. Why might this be the incorrect decision? Take a minute to think about this – if they are looking to retire, they won’t have an income to cover the debt and costs, so the property will need to do all of this – and at 80% LVR – if interest rates rise their net incomes would decline
    2. If you haven’t thought up a question and then answered your question at least 10 times on one decision, then likely not critically thoroughly about the initial problem – potentially creating a poor outcome
    3. Which when it comes to investments can be costly – but being able to narrow down your own decision process to get the right outcome is simple if you start to practice and implement this process
  2. Our decisions can be influenced easily – it is impossible to avoid a flow of information that aims to influence your decisions – from media, friends and marketing – many brand names in the supermarket sell for double the price of some generic brand even though they have the same active ingredients – like Panadol or ibuprofen
    1. Critically think about it – see some ad about a product or a news story – need to ask questions about it beyond the surface level – in a way, you not to not trust your initial response – but ask further questions about this
  3. When it comes to investing - People want to invest to make money – that is simple - but this isn’t thinking critically
    1. There are plenty of situations where someone puts money into something and it goes up – was this situation critically thought through or was it luck? This can then reinforce the behaviour to not critically think
  4. 3 Steps to critical thinking – Identify the correct question, evaluate and make a decision
    1. Critical thinking is about asking and then answering questions – this is where the core four words of Why, does, how and what come into play
      1. Answering questions isn’t about simply wrote answering based around what you assume the correct answer to be – but taking the time to answer each in full
    2. A simple rule I have for myself when critically thinking about any subject or question – is asking at least 10 questions prior to making any decision – and then aim to answer them in an unbiased way – if there is an opportunity cost to this, i.e. another alternative – do the same for that and see which answers match best with what I want
      1. This can be hard – the very way we search questions can be biased and result in a biased result
      2. Works in a chain – example – one question can open the door to other questions – and it should – once you get to the bottom of one answer – this will naturally open the door to many other questions
    3. You need to evaluate each of these questions through answering these in full – once you have your answers – you hopefully have thought through your situation to make the correct decision

Let’s look at some Examples – First step it to determine what you want – through critically thinking about it – ask yourself questions – say you want to invest, and you come to the conclusions that this is to generate a passive income to retire early – then you have to make a decision on what to purchase

  1. Property – I want to buy an investment property – why? To make money is not a good enough answer – It goes back to the basics of investing – everyone invests to make money – so you need to deeper in questioning your motives and what this property can do for you - what do you want it to do for you? Is it to get Capital growth or an income return?
    1. If income, does a property help this? Go further – what income can you get? Do the calculations:
    2. Let’s look at an average apartment investment property in Brisbane and debt servicing and run through some numbers – so you need to ask yourself some questions, like: How much are you purchasing the property for? What is your estimated rental income? What will it cost you in outgoing cashflow? How long do you plan to hold onto it? What level of capital growth do you need to make it worthwhile?
      1. Let’s say the initial purchase price is $550k – you would need to cover around $18k stamp duty plus a $110k deposit – so you need $128k of initial capital and you end up with a $440,000 loan
      2. You could rent this property out for $480 per week or $24,960 p.a. which after agent’s fees of 8% is about $22,963 p.a. in net rent – for outgoings, you have rates and BC which say are $3,500, landlord insurance at $1,500, other outgoings like utilities and maintenance at $2-3k p.a.
  • Your total costs are about $7,500 plus monthly PI interest repayments of $2,050 assuming a 3.8% interest rate on an investment loan – so what do these numbers translate into: A net cashflow loss of about $9,140 p.a. – so you would need to put $760 p.m. of your own cashflow into maintaining this property – this brings up another question: is this feasible from your current cashflow?
  1. Also – what are you after if it is income then this property may not be for you – is it capital growth? Then do you expect this property to at least go up by $10k in value each year?
  1. These are all initial questions – but get a deeper understanding about the dynamics of property
    1. What affects capital growth? Interest rates, number of properties and demographics = supply and demand - If you do your research and come to the conclusion that it is Low interest rates and demographics – then you are better positions to answer the next question in critical thinking – are interest rates going to remain where they are or go lower to help
      1. Are apartments in the area susceptible to an increased supply: available land for development and the demand for this
    2. Another question to ask: What affects net income – interest rates and the property being tenanted and in demand – if interest rates go up by 1%, your net cash outflow increases from $9k p.a. to $12,300 p.a. or around $1k p.m. – so can you afford this? Also, is this property in an area that is highly demanded by those that rent in terms of demographics?
  2. Once you have done this exercise and answered each question that comes to mind – time to evaluate –
  3. If it ticks all the boxes and you get the answers to satisfy your conditions – then you can make an affirmative decision – but another final question should always be: ‘is my capital better put to use elsewhere’? Which brings up an alternative
  1. Shares – I want to buy shares – Why? Again, making money isn’t a good enough answer – what do you really want from it?
    1. Reason for purchasing shares – capital growth and income through dividends – which one is more important to you?
    2. Do you know what you are doing? This is important – as shares can be rather volatile – if you don’t know what you are looking for with individual share purchases, is there a professional manager you can outsource your decision to?
    3. Do you need to diversify and outsource your investment decisions through purchasing an ETF or managed fund?
    4. Go through the numbers: Say you take the $128k of capital in the property example and invest it in a few ETF’s?
      1. Depending on the ETF, you could comfortably earn around $6,000 of positive income p.a. – this can be reinvested into the investment over time helping the investment compound

Really – it comes down to what you want to achieve and critically thinking through your decision

Critical thinking summary – Three stages – Identify the correct question, evaluate and make a decision

  1. Critically thinking is about asking yourself the important questions and answering them – then once you have your answers compiled – you can make a decision –
    1. Write each of these down – keep track on paper and not all in your head as this can lead to information fatigue
  2. Try not to get bogged down – it can be hard with information overload – but in a way this is a good exercise – it is practice – the more you practice this process the more it can be refined – helps to make quicker decisions and come to a conclusion
  3. It can be overwhelming at first but don’t let this put you off – think of it as practice - if you are having trouble – set a limit of questions – at 10 or 15 – if you reach this, then more on – taking no action can often be worse than being inactive

Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

  continue reading

543 פרקים

Artwork
iconשתפו
 
Manage episode 317134517 series 2148531
תוכן מסופק על ידי Finance & Fury Podcast. כל תוכן הפודקאסטים כולל פרקים, גרפיקה ותיאורי פודקאסטים מועלים ומסופקים ישירות על ידי Finance & Fury Podcast או שותף פלטפורמת הפודקאסט שלו. אם אתה מאמין שמישהו משתמש ביצירה שלך המוגנת בזכויות יוצרים ללא רשותך, אתה יכול לעקוב אחר התהליך המתואר כאן https://he.player.fm/legal.

Welcome to Finance and Fury. Sorry for the break over the past two months – been busy with moving into our newly built place – been in a process of trying to clear out lantana and fallen trees from 5,000sm – that combined with helping take care of my daughter and the excess work in a led up to the end of the year I didn’t have time to get an episode out – sorry – all weak excuses aside – in this episode – We will go through Critical thinking for making investment decisions to make 2022 your best year yet

This is a great episode to start off 2022 – as this can become your most powerful ability to make correct decision when it comes to where to allocate your finite resources – everyone on earth has finite resources financially – even Jeff Bezos or Elon Musk has only so many billions they can spend – this is a massive amount – but without creating more – if they spend it all the money runs out –

  1. Your individual ability to maximise your wealth - Is based around your ability to decern the correct financial decisions to make time and time again – making just one decision, or getting lucky once often isn’t enough to help maximise your wealth in the long term – can help in the short term – but over a long period of time, such as 20-30 years, you will make many decisions – each of these can compound off one another or they can result in set backs
    1. the aim of this episode is to try and teach a method of critical thinking
    2. not only can this be applied to this year to help work towards your financial goals – but for the rest of your life – in every area of your personal life when making a decision – when applied correctly – you will become a master of critical thinking
  2. What we will discuss is a process that helps to make a decision based around your personal situation that will equate to the best outcome for your as an individual – hence – this can be the most powerful tools in your arsenal – if you have the ability to make more correct decisions, over time, the further the compounding effects start to accelerate your life outcomes – those previous decisions become a compounding outcome the more of them you make
  3. Thinking critically isn’t taught – but it is something that we all have the ability to do
    1. We are all born as critical thinkers but this is beaten out of us from an early age – especially through institutionalised schooling – we don’t think but learn to absorb and regurgitate information
      1. Kids are in a constant state of learning – which is why they ask ‘why’ so often – they are trying to learn
    2. In high school – how many times do you ask the question “why” or “how” something works the way it does – most assessment is to get as high a score as possible on a rubric grading system and you get a grade from A to F, or out of 100 – so you lean how to get a high score without critically thinking about the assessment
    3. But it is never too late to start critically thinking

3 Steps to critical thinking – Identify the correct question, evaluate and then make a decision

  1. at its core - The solution to critical thinking is really four simple words: Why, does, how and what? These are four simple words that help anyone to develop their critical thinking skills in all areas of life
    1. The key to thinking critically about investments – or anything in reality – is this skill that can be applied to any area of your life – which requires you to think about things – the only way to really think about something is to ask yourself the correct questions, then evaluate these – helping you to narrow down to the correct decision
      1. The very nature of understanding a question comes in the form of understanding the answer – but many of us have no idea about the answer to our own questions
    2. Sure – you can sit back and have someone else spit information at you – which you can blindly follow – but this isn’t critical thinking – it is being told what to do and following without a fuss – but this can lead you down the wrong path

Critical thinking is important – allows you to come to the correct conclusion for your own situations

  1. Taking a step back and looking at my own personal experience when it comes to initial meeting with clients - Most people I have met don’t think about the investment itself and if it is best option for them – they simply want to invest into an asset class because they have heard of others doing it – i.e. their critical thinking around making a decision is that others have done it – i.e. monkey see monkey do – is this real critical thinking?
    1. Some examples – Someone in their mid-60s who is looking to retire in the next few years purchases an investment property that is leveraged at 80% because they went to a seminar about property investment
      1. Why might this be the incorrect decision? Take a minute to think about this – if they are looking to retire, they won’t have an income to cover the debt and costs, so the property will need to do all of this – and at 80% LVR – if interest rates rise their net incomes would decline
    2. If you haven’t thought up a question and then answered your question at least 10 times on one decision, then likely not critically thoroughly about the initial problem – potentially creating a poor outcome
    3. Which when it comes to investments can be costly – but being able to narrow down your own decision process to get the right outcome is simple if you start to practice and implement this process
  2. Our decisions can be influenced easily – it is impossible to avoid a flow of information that aims to influence your decisions – from media, friends and marketing – many brand names in the supermarket sell for double the price of some generic brand even though they have the same active ingredients – like Panadol or ibuprofen
    1. Critically think about it – see some ad about a product or a news story – need to ask questions about it beyond the surface level – in a way, you not to not trust your initial response – but ask further questions about this
  3. When it comes to investing - People want to invest to make money – that is simple - but this isn’t thinking critically
    1. There are plenty of situations where someone puts money into something and it goes up – was this situation critically thought through or was it luck? This can then reinforce the behaviour to not critically think
  4. 3 Steps to critical thinking – Identify the correct question, evaluate and make a decision
    1. Critical thinking is about asking and then answering questions – this is where the core four words of Why, does, how and what come into play
      1. Answering questions isn’t about simply wrote answering based around what you assume the correct answer to be – but taking the time to answer each in full
    2. A simple rule I have for myself when critically thinking about any subject or question – is asking at least 10 questions prior to making any decision – and then aim to answer them in an unbiased way – if there is an opportunity cost to this, i.e. another alternative – do the same for that and see which answers match best with what I want
      1. This can be hard – the very way we search questions can be biased and result in a biased result
      2. Works in a chain – example – one question can open the door to other questions – and it should – once you get to the bottom of one answer – this will naturally open the door to many other questions
    3. You need to evaluate each of these questions through answering these in full – once you have your answers – you hopefully have thought through your situation to make the correct decision

Let’s look at some Examples – First step it to determine what you want – through critically thinking about it – ask yourself questions – say you want to invest, and you come to the conclusions that this is to generate a passive income to retire early – then you have to make a decision on what to purchase

  1. Property – I want to buy an investment property – why? To make money is not a good enough answer – It goes back to the basics of investing – everyone invests to make money – so you need to deeper in questioning your motives and what this property can do for you - what do you want it to do for you? Is it to get Capital growth or an income return?
    1. If income, does a property help this? Go further – what income can you get? Do the calculations:
    2. Let’s look at an average apartment investment property in Brisbane and debt servicing and run through some numbers – so you need to ask yourself some questions, like: How much are you purchasing the property for? What is your estimated rental income? What will it cost you in outgoing cashflow? How long do you plan to hold onto it? What level of capital growth do you need to make it worthwhile?
      1. Let’s say the initial purchase price is $550k – you would need to cover around $18k stamp duty plus a $110k deposit – so you need $128k of initial capital and you end up with a $440,000 loan
      2. You could rent this property out for $480 per week or $24,960 p.a. which after agent’s fees of 8% is about $22,963 p.a. in net rent – for outgoings, you have rates and BC which say are $3,500, landlord insurance at $1,500, other outgoings like utilities and maintenance at $2-3k p.a.
  • Your total costs are about $7,500 plus monthly PI interest repayments of $2,050 assuming a 3.8% interest rate on an investment loan – so what do these numbers translate into: A net cashflow loss of about $9,140 p.a. – so you would need to put $760 p.m. of your own cashflow into maintaining this property – this brings up another question: is this feasible from your current cashflow?
  1. Also – what are you after if it is income then this property may not be for you – is it capital growth? Then do you expect this property to at least go up by $10k in value each year?
  1. These are all initial questions – but get a deeper understanding about the dynamics of property
    1. What affects capital growth? Interest rates, number of properties and demographics = supply and demand - If you do your research and come to the conclusion that it is Low interest rates and demographics – then you are better positions to answer the next question in critical thinking – are interest rates going to remain where they are or go lower to help
      1. Are apartments in the area susceptible to an increased supply: available land for development and the demand for this
    2. Another question to ask: What affects net income – interest rates and the property being tenanted and in demand – if interest rates go up by 1%, your net cash outflow increases from $9k p.a. to $12,300 p.a. or around $1k p.m. – so can you afford this? Also, is this property in an area that is highly demanded by those that rent in terms of demographics?
  2. Once you have done this exercise and answered each question that comes to mind – time to evaluate –
  3. If it ticks all the boxes and you get the answers to satisfy your conditions – then you can make an affirmative decision – but another final question should always be: ‘is my capital better put to use elsewhere’? Which brings up an alternative
  1. Shares – I want to buy shares – Why? Again, making money isn’t a good enough answer – what do you really want from it?
    1. Reason for purchasing shares – capital growth and income through dividends – which one is more important to you?
    2. Do you know what you are doing? This is important – as shares can be rather volatile – if you don’t know what you are looking for with individual share purchases, is there a professional manager you can outsource your decision to?
    3. Do you need to diversify and outsource your investment decisions through purchasing an ETF or managed fund?
    4. Go through the numbers: Say you take the $128k of capital in the property example and invest it in a few ETF’s?
      1. Depending on the ETF, you could comfortably earn around $6,000 of positive income p.a. – this can be reinvested into the investment over time helping the investment compound

Really – it comes down to what you want to achieve and critically thinking through your decision

Critical thinking summary – Three stages – Identify the correct question, evaluate and make a decision

  1. Critically thinking is about asking yourself the important questions and answering them – then once you have your answers compiled – you can make a decision –
    1. Write each of these down – keep track on paper and not all in your head as this can lead to information fatigue
  2. Try not to get bogged down – it can be hard with information overload – but in a way this is a good exercise – it is practice – the more you practice this process the more it can be refined – helps to make quicker decisions and come to a conclusion
  3. It can be overwhelming at first but don’t let this put you off – think of it as practice - if you are having trouble – set a limit of questions – at 10 or 15 – if you reach this, then more on – taking no action can often be worse than being inactive

Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

  continue reading

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