5 Questions To Ask Before Investing

The one question we get asked the most is probably, “What should I invest in?” And we’re tempted to share hot tips about *#&%&#** and #$@!

* seriously, put your money there and you can’t lose.

But instead, we usually just say, “It depends.” Investing should always be looked at through your personal context.

What might be a sound investment for your bestie might be totally inappropriate for you.

So if you’re considering dipping your toe into investing and wondering where to start, the first step is to ask yourself 5 important questions before putting any money on the line.

When confronted with an investment opportunity, most people wonder how much money they’ll make, when the more appropriate question is “How Much Am I Willing to Lose?” If you have a thousand dollars to invest, how would you feel if you lost a hundred of that.

Two hundred?

Five hundred?

Now, if the thought of losing money at all makes you sweat a little, you’re not alone.

“Loss Aversion” is the term psychologists use for our tendency to fear losses more than we enjoy gains.

It’s why many investors sold off their holdings during the market crash of 2008.

They overestimated their risk tolerance when times were good, and ended up selling at a loss when the seas got stormy.

Knowing your personal threshold for this loss-pain (even short-term) is a great start to knowing what kind of investment is right for you.

The second question you should ask yourself is what is the goal or purpose of this investment?

Is it for your retirement?

For your child’s college?

A trip around the world?

Each of these goals probably has a completely different time-scale.

If your goal is far into the future, you could probably handle a more aggressive long-term investment option like the stock market or real estate and take on more risk.

That way you can leverage the longer time-line and put yourself in the position to receive the maximum reward while also allowing yourself space to recover from a recession.

But if you are just a year or two from your investment goal, a dip in the market might mean you can’t afford to pay for that goal, so you’re probably better off sticking with something less volatile, like a CD or a bond fund.. One of the habits in Stephen Covey’s classic “7 Habits of Highly Successful People” is: Begin with the end in mind.

And nowhere is this more true than in investing.

As you consider your goals you should ultimately make a decision on the circumstances that would lead you to selling the investment.

This helps you avoid selling in a panic or hopping from one “greener pasture” to another.

For example, you might decide that you plan to own an investment for at least 10 years.

Or that you’ll get out if the investment loses 10%.

Knowing these details in advance will help you both pick an investment with realistic goals, and help you keep your head if the news headlines get hysterical.

It’s okay to allow your rules to be a little flexible, but having no plan at all can lead to your decisions being driven by emotions like greed, fear, or panic.

Many brokers and investment companies are notorious for hiding fees or making them super-complicated, so it can be tricky to figure out exactly how much an investment cost.

Sometimes there’s a simple one-time fee — like a stock-trading service that charges per-trade.

Mutual funds and index funds, on the other hand, charge you a percentage of the money you invest every year, and perhaps even an extra sales-charge in the form of a “front-end-load”.

An investment advisor will typically add an additional fee-layer for the service.

So if you hire one, be sure they’re providing plenty of value.

Even investment options that appear to be free, like CD’s and high-yield savings accounts come with “opportunity costs.” They’re re-investing your money into higher-paying investments and pocketing the difference.

Free investment apps like Robinhood generate income by earning interest on whatever cash you have in your account that isn’t currently in an investment.

To be clear, paying a price to invest isn’t bad, or even something you can always avoid.

Just make sure you know what you’re paying, so you can decide for yourself if you’re getting your money’s worth.

It would be fine to put all your money on a single roll of the dice if you could be certain of the outcome.

But in the real world, there’s never a sure-thing.

Spreading your assets out and avoiding over-concentration can help ensure that your fate isn’t in the hands of any single company, sector, or industry.

For example, let’s say you have most of your savings in the stock of the company you work for.

What would happen if your employer suddenly went belly-up?

You’d not only be out of a job, but that money you were counting on for retirement could evaporate.

A financial advisor might recommend selling off some of that stock and diversifying elsewhere, like buying a home or opening up an IRA.

Remember that 2008 crash?

Many people had the bulk of their net worth tied up in their homes and couldn’t afford to ride out the storm.

Balance is key.

So whenever you’re trying to decide on a new investment, consider how it relates to the rest of your assets.

If there were a one-size fits all that worked for every person in every situation, it would make our job a lot easier.

But picking the right investment doesn’t have to be as overwhelming as you might think.

Asking yourself a few basic questions can go a long way to simplifying which choice is best for you no matter what surprises might be around the corner.

And that’s our two cents!