It has never been easier or cheaper to buy investments on your own.
Websites like: E Trade, Scott Trade, Vanguard.
Apps like: Robin Hood, Acorns
All allow you to trade at the click of a button.
But does that mean you should?
This post discusses the top 5 investing questions you should ask BEFORE parting with your cold hard cash.
I easily could have written 100 questions but to keep it simple here the top 5 you should start with!
Top 5 Investing Questions
1. Am I buying this for growth or income?
There are bonds that make coupon payments (income).
There are stocks that pay dividends (income)
There are bonds that do not make coupon payments but instead mature at a higher amount.
There are stocks that do not pay dividends.
Before making an investment it’s important for you to understand your current situation and what you need the investment to do for you.
Also, when you are deciding what investments to buy, you must look at the company’s history to see how it has used capital before.
Do they return profits to shareholders or are they growing so rapidly they need to plow every dollar back into their company?
If they have issued bonds before, do the retire them early? Have they ever defaulted?
So many times I see investors buy certain investments with one expected outcome and get another and be disappointed.
2. Does this purchase make sense just today or at any time?
All of our emotions run hot during intense market moves.
The worst thing to do (yet people do it all the time) is to get caught up in the run, make inappropriate purchases because they don’t want to feel like they are missing out. (check out my post about investor emotions)
So before pulling the trigger, ask yourself, Does this make sense just today?
If the answer is yes, do not make the purchase.
Your emotions have taken control and it will not end well.
https://www.behaviorgap.com/avoiding-cycle-fear-greed/ (not endorsed by IFS)
Ultimately, you want to buy investments that will help you accomplish your goals and objectives over the long term, not just because you don’t want to “miss out.” So, instead focus on investments that you would buy during any market condition and you plan on holding for a long time.
3.Will this increase or decrease the volatility in my portfolio?
One investing strategy is “DIVERSIFICATION.”
“Diversification is a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.”
(http://www.investopedia.com/terms/d/diversification.asp not endorsed by IFS)
While we can not control the returns in our portfolio, we can control the volatility. The more similar the investments are, the more they will move together. That can be great on the upside, but truly devastating on the downside.
So the purpose of this question is to make sure you know if you are buying more of the “same” or something different.
4. How far does this have to go down before I sell it?
This is a question most people overlook because they truly believe every investment they make will only go UP in value. Because of this, they are more likely to sell their “winners” and hold their “losers.”
In reality, they should do the exact opposite. Let your winners run and sell your losers!
Before you buy, give yourself a limit, that if it goes down in value by X % (10,20,30) you will sell no matter what!
That $20 stock that is currently trading for 10 cents, WILL NEVER RECOVER!
The more investing rules you can build for yourself, once again, allows you to take the emotion out of investing, putting you in a better position to be successful.
5. If I could only make 1 investment in my life, would this be it?
Now this question might be a little over the top. You should be able to make more than 1 investment in your life, but the purpose is to get you thinking.
..and it should lead to more questions- like have you done your homework? Have you fully investigated this company, do you understand their business model? Is it sustainable?
OR
are you making a quick judgement? Have you been blinded by a news report or something you read on a blog?
Take a deep breath and put in the work to determine if this is right for you!
Wrap up
Before you make any investments, take a moment and ask yourself these 5 investing questions.
- Am I buying this for growth or income?
- Does this purchase make sense just today or at any time?
- Will this increase or decrease the volatility in my portfolio?
- How far does this have to go down before I sell it?
- If I could only make 1 investment in my life, would this be it?
To be honest, they will not guarantee you 6% or 8% or any percent on your money.
Instead they will allow you to invest without any emotional ties and more clarity than ever before. And because of that, you will have given yourself the best opportunity for success!
As always, you can consult with me to discuss your current situation
Look for future posts on important financial planning topics and check out my recent post on financial goal setting.
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Thanks for stopping by and I hope you achieve financial success!
