I’ve grown very fond of a feature within The Weather Channel app. It’s called the GoRun Index. The index uses a 1-10 scale to rate running conditions. 1 indicates difficult conditions and 10 indicates prime conditions.
What I like about the GoRun Index is that it’s identified four important factors that affect conditions. These factors are simple enough to not overcomplicate things, but also significant enough to make a noticeable difference.
The index default settings equally weight the effects of temperature, humidity, precipitation, and wind, but you can also tweak those factors to your preferences if you want. In my experience, mild temperatures, with low humidity, wind, and precipitation tend to be rated highest.
While I don’t let this score completely dictate whether I run or not on any particular day, I have noticed that my runs are more pleasant when conditions are strongly rated.
In the same vein, I’ve thought of my own set of criteria that rates how ready somebody is to focus on investing. To be extremely uncreative, we’ll call it the GoInvest Index.
At my firm, we frequently see individuals who are looking to optimize their investments. While this is a worthwhile endeavor, often several important steps have been bypassed. This is natural behavior because investing is the “exciting” part of a financial plan. However, “skipping to the good part” isn’t exactly a recipe for success. The GoInvest Index identifies four areas that individuals should look to sure up before focusing time and effort on investment optimization.
Cash Flow – Focusing time and effort on investments before ensuring that your cash flows are positive is kind of like trying to row faster in a boat that’s taking on water. Eventually you’re going to sink and you’ll be tired from all the rowing. Going through cash flows can be uncomfortable, but it’s a reading that needs to be taken.
Savings Rate – As I made clear in a previous post, I believe that your savings will do the heavy lifting during the accumulation phase. It makes sense to spend as much time optimizing your savings rate as you spend researching investment ideas. Take care to save as much as you reasonably can, but also consider where your savings will be best applied.
Debt Management – If you’ve ensured your cash flows are positive and that you’re saving enough money, I’d take a careful look at your debt. Before focusing on investing, high interest credit card debt should be completely paid off. You may not need to completely pay off other debts (mortgage, student loans, car loan, etc.) before investing your savings, but that’s a more personal decision. You ultimately want to make sure that your debts are being managed to an extent that makes sense and makes you comfortable.
Emergency Fund – Becoming a forced seller is never good. This is why you’ll want to have an emergency fund. Depending on your situation and feelings, anywhere from 3-12 months of living expenses should be banked somewhere safe and accessible. This will hopefully enable you to not tap into long term investments for short term emergencies.
These are four simple factors that I believe will significantly improve investor outcomes. These factors may be less interesting than investments, but I think they’re fundamental to success. Just as it’s easier to run on a mild, low humidity day, it’ll be easier to succeed with your investments if your personal financial conditions are right.