What Are 9 Questions You Should Ask When Investing?

I began investing in my 20s. I worked with a licensed financial professional who provided guidance and support to determine which investments fit my goals and time horizon. I’ve met with her throughout the years to rebalance my portfolio and stay on track with my goals.

Understanding which questions to ask when investing helps facilitate the process. The following suggestions can help.

1. What Do You Want to Achieve with the Investment?

Create a goal and time horizon for each investment. For instance, saving for a vehicle, vacation, or down payment on a home could be accomplished with investment products that last 3 years or less. Examples include short-term U.S. government bonds, treasuries, and corporate bonds. For a longer time horizon, such as saving for a child’s college education or your retirement, dividend stocks, bond funds, or growth stocks might be appropriate.

2. What Is Your Risk Tolerance?

How comfortable you are with potentially losing money impacts which investments are appropriate options. For instance, you might be more risk-averse if your time horizon is less than 3 years. Conversely, you might be willing to accept more risk for a longer time horizon with additional time to recover from market downturns.

3. What Is the Right Mix of Investment for Your Portfolio?

Diversifying your investments across asset classes, such as bonds, mutual funds, and stocks, as well as across industries and geographies, reduces the impact of market fluctuations on your portfolio. The ability to offset gains and losses in different areas helps you stay on track with reaching your financial goals.

4. How Do the Risks Compare with the Potential Rewards?

Because investments with greater risk typically offer higher potential returns, they usually expose investors to greater losses. Ensure your risk tolerance aligns with the investments you choose and the potential loss of the amount invested.

5. Who Is Managing the Investment?

The management team’s competence and integrity influence the success of the investment. Research the team’s track record and reputation to evaluate their adherence to transparency and ethical practices.

6. What Is the Track Record of the Fund or Company?

Research and/or talk with a licensed financial professional about the fund or company in which you are considering investing. Although past performance is not a guarantee of future results, it provides a picture of the fund or company’s stability and growth potential.

7. What Are the Costs Associated with the Investment?

Understand the investment fees and costs, including broker fees, transaction fees, and management fees. These expenses reduce your returns, affecting your ability to reach your goals.

8. What Are the Tax Implications of the Investment?

Understand how an investment is taxed and how it affects your financial situation. For instance, long-term capital gains from U.S. investments held longer than 1 year are taxed at a lower rate than short-term gains. An investment’s taxability might influence your decision to retain or sell it.

9. Do You Understand the Investment?

Talk with a licensed financial professional if you do not understand an investment and its potential returns. Although the prospectus or disclosure statement should include everything you need to know before investing, the information can be confusing. If you still do not understand the investment, consider other options.

*This information is for educational purposes only.