Many people are venturing into the world of investing in a bid to make extra cash during these tough economic times. Before committing to a specific investment product or portfolio, it’s important to understand why you’re investing and the risks that are involved.
Sydney Sekese, a certified financial planner, notes ten questions you should ask before making a commitment.
1. Am I financially fit?
If you have a lot of debt, it doesn’t make sense to invest elsewhere. Focus instead on paying off your debt, Sekese says, to ensure that you are working towards a goal and not creating a shortfall.
2. What will I do with the money I earn?
Your end goal for the proceeds of your investment should be considered upfront. This should guide the type of investment that you choose.
3. Do I know my options?
For first-time investors, a good mutual fund is a safer option than dabbling in stock yourself. Sekese says, “Riskier investments are better suited to those with a deep understanding of investments and markets.”
4. Where is the best place to invest?
It’s important to diversify your portfolio to protect yourself against poor performance in a particular market. “If you can’t afford more than one stock, get involved in a mutual fund or exchange traded fund (ETF),” advises Sekese.
5. When should I start?
Regardless of the investment type, including retirement saving, time is a valuable asset. Sekese notes the importance of compound interest - or interest earned on interest, and the earlier you start saving and investing, the more you’ll benefit from this.
That aside, Sekese notes, it’s never too late to start investing.
6. What’s the risk?
There is always a risk when it comes to investments. No one, not matter how skilled, can accurately predict the future of the stock market.
Past performance by a fund is no indication as to how it will perform in the future. As Sekese points out, “Professionals can make educated estimates as to where the markets will go, but there is never 100% certainty.”
7. Do I need a financial planner?
A financial planner is a wise inclusion when considering investments. A certified professional will be able to provide various options to help you achieve your investment goals, and help you understand the risks of each investment before you commit.
8. Will I be charged?
There are fees associated with investing. Sekese says, “If you’re getting professional help you will have to pay either a percentage of your portfolio or a flat fee. Robo-advisors, mutual funds and ETFs also charge fees. Do your research beforehand in order to minimise these.”
9. Will I have to pay taxes?
When your investment starts to earn money, you will be required to pay capital gains tax. However, if you are investing in retirement accounts, you may be eligible to receive a tax break.
10. How do I limit my exposure to nasty surprises?
To avoid any “nasty surprises”, Sekese suggests placing a small portion of your money into risky investments and a larger portion into safe investments.
“A treasury investment is ideal for this and will protect you if the market does something unexpected,” says Sekese.