I’m a Financial Advisor: 5 Things You Should Consider Before Making an Investment
If you’ve started investing your money, you’ve likely noticed all the existing opportunities, and there seems to be no shortage of investment ideas. You may even get unsolicited investing advice from a relative at a family function or get intrigued after seeing a celebrity endorsing some financial product on social media. Since there’s an abundance of information about investing, we wanted to look at what you need to think about before investing your money so that you don’t end up losing it.
What should you look into before investing in something?
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Do You Understand the Investment?
“For any investment, you need to follow a core rule: Only invest in what you understand,” said Jay Zigmont, Ph.D., certified financial planner and founder of Childfree Wealth.
According to the Federal Trade Commission (FTC), Americans lost $4.6 billion to investment scams in 2023. Unfortunately, this figure is up 21% from 2022, as digital tools have made it easier than ever for fraudsters to find unsuspecting victims. It’s clear that many people invested money in things they didn’t understand, as scammers are becoming more sophisticated in their approach.
Understanding the investment means that you’re aware of what you’re allocating your funds toward. You want to be confident in knowing what kind of asset you’re investing in.
Here are a few things that you should try to understand about the investment:
The asset type. Will this asset be a stock, mutual fund, property or something else?
How you’ll earn money on your investment. Will you be waiting for this asset to appreciate in value or do you plan on participating in profit sharing through dividends?
If you don’t fundamentally understand the investment, you should be skeptical about it. You don’t want to be scammed out of your savings.
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What Are You Investing In?
“You need to understand what you are buying and how it works,” Zigmont said. He stated the different investment options, including stocks, bonds, Exchange-Traded Fund (ETFs), mutual funds, etc.
You have to know what you’re investing in. Here are a few other points to think about:
Do you know what kind of stock this is? Before you invest, it’s essential that you research the company’s financial health and industry.
Do you know what type of investment fund this is? If you invest in an ETF, mutual fund or index fund, you want to know what kind of companies are in the pool.
If you don’t know what you’re investing in, you’ll want to conduct additional research.
Do You Know Where Your Money Will Be?
“Where you keep your investments will impact your taxes and which investments should be kept there,” Zigmont said. “For example, you will probably want to fill up your tax-advantaged accounts such as 401ks or IRAs before investing in your taxable brokerage.”
One of the most important aspects of an investment is knowing where your funds will be stored. You want to ensure that the bank is FDIC-insured and that you don’t have to worry about losing money.
On the other hand, you also want to learn where your funds will be placed if you invest them into assets. You also want to learn about the possible tax implications of where you’re investing your money so that you don’t have financial issues in the future.
What Are Your Financial Goals?
“Your financial plan and goals will impact how you invest,” Zigmont said.
When it comes to investing advice, it’s difficult to give a one-size-fits-all response since we all have a unique starting point and varying goals.
There are numerous factors to review when it comes to your financial goals, including:
How soon do you need the money? Your investing horizon is important because you don’t want to take unnecessary risks with the money you’ll need soon.
What are you investing for? Do you have anything you’re specifically investing for?
Where do you want to be in the next five years? It makes sense to have a rough plan for the next few years so that you can adjust your investing strategy accordingly.
We all have different financial goals and it makes sense for our investing strategies to match them. For example, if you’re looking to start a family in the near future, you may not want to take as many risks as someone setting up a retirement portfolio early on in their career.
How Much Risk Can You Handle?
“You need to understand the risk versus reward of an investment and how aggressive you need to be to meet your goals,” Zigmont said.
It’s crucial that you consider the risks involved with every investment. You don’t want to be blindsided by a possible market swing and some assets have inherent concerns.
Here are some examples when it comes to risks and investments:
Your money will be safe in a high-yield savings account, but there’s a limit to how much you can earn on it.
You can invest in a risky real estate project with the promise of high returns, but there are no guarantees that the project will succeed.
If you have a wedding in two years that requires a heavy financial commitment, you may not want to risk this money on the stock market, where there are fluctuations at times.
Your personal risk tolerance should always be considered before investing because you don’t want to lose sleep over what’s happening with your money.
Additional Investment Considerations
Before you invest your money into anything, there are a few other questions that you should ask yourself, such as:
Is this too good to be true?
Do I know anyone else who has done this?
Do I trust the source of information?
As tempting as it is to seek out the best possible investment based on high returns, you want to ensure you’re not blindly allocating your funds to something that could hurt your savings.
“Understanding investments includes knowing what you are investing in, where to keep it, and how it impacts your financial plan,” Zigmont said.
These are critical points that you should thoroughly consider before you make any kind of investment. You don’t have to become a financial expert to grow your money, but you want to know what’s happening with your funds.
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This article originally appeared on GOBankingRates.com: I’m a Financial Advisor: 5 Things You Should Consider Before Making an Investment
