Picking a financial advisor
Investing is not a one-size-fits-all type of pursuit. Do you prefer an aggressive strategy, or a more conservative approach? How do factors such as your age, financial status, and personality relate to investment decisions you plan to make? Does your financial adviser understand your situation and are the two of you basically compatible?
Find the right person to help you
Even before you start considering what to buy, you need to be sure you are working with a reliable, honest and experienced professional that can guide you along the path you wish to follow. Be wary of salespeople who pressure you, who think that they've got one "super," exclusive, "limited-time-only" investment that everyone should own, or who urge you to immediately open an account and do a transaction.
Like money in the bank... or is it?
Some may recall that in the late 1990's certain financial advisers strongly encouraged their clients to invest in the hottest internet stocks. they encouraged clients to use margin, even take out mortgages on their homes to cover the stock purchases. When the internet bubble burst, shareholders found they had lost thousands, or hundreds of thousands -- of dollars. Pressure and over-enthusiasm had caused many buyers to risk money they could not afford to lose and to suffer the consequences when the prices tumbled.
When excited brokers tell you about a once-in-a-lifetime opportunity, or when advertisements catch your eye with their charts showing guarantees of fantastic returns, stop and think. Take to heart the typical disclaimer that follows many financial reports and documents, "Past success of this investment does not guarantee future performance." The investment firm's lawyer requires the firm to write that because it's true: Just because something did well yesterday, that is not any proof that it will do well tomorrow.
What risks will you take?
While you may know what you don't want, you may not always know exactly what you need - especially if you are new to investing. The factors that enable more aggressive companies to skyrocket in value may change quickly causing these high-flyer's to crash and burn. So, if you're considering the idea of exploring some hot stock, ask yourself, "Can I handle the risk?" Talk it over with your adviser to assess if this purchase should become a part of your portfolio and, if so, to what degree.
Understand your needs
There are general rules that can help you make sensible selections. Perhaps the most important guideline is the following: Let your time frame influence the amount of risk you can assume. For young investors who are saving up for retirement, time is a great asset. Because they have so many years ahead of them for their money to grow, they can seek out larger, more speculative returns in a portion of their portfolios. Should some of their choices not work out well they can absorb the losses since they have many years ahead of them to recoup. For these same investors, however, when saving for nearer-term goals -- such as the purchase of homes, the starting of families, etc., investment choices should be less risky.
Your financial adviser and you
As an investor, be aware that every decision you make ultimately affects you. Your financial consultant provides professional advice and valuable information, but at the end of the day, the choices are yours. As the client, you should be sure that you understand every transaction that you agree to conduct. Make sure that you ask questions, repeatedly if necessary, to be certain that you know what you are getting into. And if you don't feel comfortable with your adviser's suggestions, don't hesitate to speak out.
Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com.