8 Questions to Answer Before You Make an Investment
Are you planning to make an investment? When it comes to investing, there is a wealth of choice and many decisions to be made. Choosing the right investment for you is the key to success. Everyone will likely have an opinion on the type of investment you should make. Your family will have recommendations, ideas and will want to share them with you. You may have business colleagues who have successfully invested in the past (or unsuccessfully!) and want to share their ˜wisdom'. Friends who work for financial companies will often have tips and suggestions on where to make your investment. If you Google, "make an investment", you will be overwhelmed with articles giving you advice and suggested investment opportunities.
With all of these voices, how do you choose whether to make an individual investment and, if you've decided it's the right move for you, which investment is worth your money? The best way to start this process is to take a step back, ask some cold hard questions and make a fully informed decision. That's where Trading Education comes in providing you with the information you need to make the right choice for you.
Matt Becker, writing for The Simple Dollar, suggests that are eight questions you need to ask before you invest in anything.
1. What is the goal of your investment?
When people talk about making an investment or having a ˜hot tip' of a sure-fire investment, it can be easy to get carried away. The idea of a sure-fire way to make money is music to anyone's ears. But it's important to take a moment to remind yourself what the goal of your investment actually is. As Matt suggests, your goal is never to beat the market or often even to maximise your return. The best investment decisions are personal goals that mean something to you. Perhaps you want enough money to travel, to retire well, to pay for your kids to go to university.
Investment goals are always about having a specific amount of money by a specific date to do something important in your life.
So keep your eye on your goals and don't allow yourself to be distracted by the latest hot tip as Matt explains, serve your goals with your investment decisions.
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2. How do you feel considering this investment decision?
The thing about making investments is that you can never totally separate your emotions from the process. Whether it is a high or a low, there are lots of twists and turns along the way and you will likely feel the pressure.
Matt has some great advice avoid making any big investment decisions when your emotions are running high. So, when you are considering the next investment decision, take a moment and consider how you are feeling are you nervous, anxious, scared, tense?
The best advice is to sleep on it. There will always be another investment choice but you could risk making a rash decision you later regret due to your emotions.
3. How much do you understand this investment?
According to Matt, the best investments are often the simplest. While you may get financial professionals trying to convince you otherwise, the truth is, complex investments typically have higher costs, lower returns, and more unintended consequences. So there is nothing wrong with keeping it simple.
Try this as a rule of thumb if you can't explain yourself how an investment works, in a minute or less, maybe it isn't the right choice for reaching your investment goals.
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4. What is the cost of this investment?
You should be doing everything possible to minimise the cost of your investment so you can see returns. That's because the less an investment costs, the more likely it is to provide those good returns you are looking for to reach your goals. Watch out for unexpected costs too. The more complicated an investment choice the more likely it will be to have hidden fees in its moving parts. Keep it simple and fully understand the costs involved before you invest.
5. How do your investments fit together?
This is key to getting the right investment portfolio for you. No investment works in isolation so choose the right complement. Choose a group of investments that will work together to achieve your goal. When considering employer stock, for example, The Simple Dollar has some great content on understanding how it may affect your overall asset allocation and if buying employer stock will tie too much of your financial future to the fate of your employer.
As with all of these questions, your investment decisions need to work for your goal.
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6. How easy is it to get out of this investment?
First of all, it's worth reiterating Matt's excellent point in his article: you shouldn't be looking to switch your investment portfolio that often. But you don't want to unnecessarily lock yourself in either. Asking yourself how easy it will be to get out of this investment is always a wise move. For example, switching mutual funds within a 401(k) is simple, hardly ever has trading fees and no tax consequences. An investment with a taxable brokerage account can be more difficult to get out of and requires some thought first because of the taxes and trading fees. Then there is the nightmare of getting out of a whole life insurance investment, where you can lose fees and may owe taxes to get out early.
7. Who is recommending the investment and why?
Before you make any investment, consider the person who is recommending the idea to you. Are they an expert in their field? Do they have the experience and knowledge to advise you? Is it an unbiased recommendation? If they are someone you're close to, like a family member or friend, it's OK to question how much they actually know. If it is a financial professional, it is equally OK to question how they are paid do they benefit from you making an investment?
Take recommendations from people who know what they are talking about and have your best interests in mind, not their own. That's why Trading Education exists to help you make the right choices for your investments.
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8. Is there any need to make a new investment?
The final question to ask before considering a new investment is do you need to make a change in your current circumstances? If you have a portfolio that is working for you, do you need to make a change?
Find out more on choosing the right investments for you at Trading Education.
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