Whether you’re investing for the first time or if you’ve been doing it a while, it’s not something you should rush into. Here are 5 questions you should ask yourself before you invest in anything.
Do I understand what I’m investing in?
Things that sound too good to be true often are, and it’s the same with investing. It’s important that if you are going to risk your money, that you should have a pretty good understanding of how your investment works. There is a risk that if the details of an investment can’t be clearly explained then either the person selling it doesn’t understand it or worse, they are trying to hide something. It’s important that you understand the strategy behind the investment and crucial factors like when you will be able to access your money. Don’t be blinded by fantastic rates or huge promises, it’s your money that is at risk, so it’s important that you know all the facts.
How much does it cost?
When you’re selecting your investments it’s important that you are aware of how much it’s going to cost you. Especially if you’re an inexperienced investor, you should be avoiding investing more than 10% of your income. The less of your money you risk the less impact it will upon your standard of living if you don’t get it back. Be wary of investor fees too, sometimes these will be taken upfront or can be a proportion of any returns that you make, but either way you should factor this in. It’s important to think about taxation too and whether you are investing through a tax wrapper like an ISA or if you will be required to calculate your own tax at the end of the investment period.
How does it fit with my goals?
We’ve all got things that we’re working towards in our future but understanding how your investment fits into your plans is very important. Considering when and how much of your money you’ll need access to over the next few years can be crucial if you’re thinking of buying a house or starting a family. If this is the case, you’ll likely want to avoid anything that ties your money up for lengthy periods of time.
What are the down sides?
All investing carries risk, but it’s important to understand just how much risk you are taking on. Investing in a single asset such as Bitcoin or a single property can be very volatile, so if the market doesn’t perform well you risk losing all your money. Alternatively, spreading your money across multiple assets can help you reduce risk by lowering your exposure to a single asset and diversifying your portfolio
How easily can I get out?
Many investments benefit from being held for a certain length of time to help you ride out any storms and earn more stable returns. However, if you choose to exit an investment early, you may not reap the rewards you hoped for. Stock and shares by their nature are a liquid asset which allows you to exit whenever you like. As a result of this, people can end up exiting when things go bad rather than waiting for their investment to recover.
Patience is extremely important, as in the long run most losses can be recovered. Some investments including loans or bonds are highly illiquid meaning you don’t have the option to access your money unless there is a secondary market. If you’re opting for this kind of investment, it may well carry higher returns as a result of the illiquidity, but you need to think carefully about whether you will need access to your money in the near future.
Overall the key point to take away from this post is that investing is unique to everyone, liquidity, risk appetite, size of the investment and understanding of the product are all significant things to consider. Not only this but understanding you are always taking a risk when investing.
The opinions expressed in this blog post are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry.