Checklist: Ten Tips for Smarter Investing
Investments require careful consideration. The wrong choice can cost you! So before you buy, use this checklist to determine if an investment is right for you and if you have enough information about it.
1. Do I understand the investment?
To invest your money properly, it's important to know exactly what you're investing in. What is the business of the company in which you want to buy shares? Who is the borrower of a bond? In the case of funds, you must understand how they are structured and what the fund manager's investment strategy is. Before buying more complex products, such as derivatives or hedge funds, you must understand how they work.
2. What are my performance expectations?
Think about your return expectations. Are they realistic? To get an idea, look at the performance over the past few years. Companies listed on the stock exchange also publish annual reports. Don't just consider the investment itself—think about the industry and the country, too. However, past performance is no guarantee of future results.
3. How high is the risk?
High returns are enticing, but usually involve more risk. Make sure you know the risk of any investment you're considering. How high are the expected price fluctuations? Could you lose some, or even all, of your money?
4. Does the risk match my investment strategy?
Once you know the risk of an investment, compare it with your strategy. If the risk is too high, it's best not to invest. Also keep your portfolio mix in mind. If you currently have a lot of low-risk investments, you are better placed to take a risk than if you've already reached your limit of high-risk investments.
5. Who is the issuer?
The issuer of a security also poses a risk. If it goes bankrupt, the investment is also likely to be worthless. That's why it's important to know who has launched the product on the market. Equities are always issued by a company; bonds can be issued by a company, a government, or another institution. For funds and structured products, you can find information on the issuer in the product description. Buy products only if you trust the issuers and know their credit risk.
6. How long is the ideal investment time horizon?
Equities should be held for the long term. Their prices can fluctuate greatly. There are short-term and long-term bonds. Find out the relevant time period of an investment and whether it meets your needs. Nothing's worse than having to sell an investment for less than the purchase price!
7. Will the portfolio still be well diversified after the purchase?
You must have sufficient diversification to balance out portfolio risks. So check to see if you already have similar investments. A mix of asset classes and other criteria, such as countries and industries, should be guaranteed after a purchase, as well.
8. What are the fees?
Fees are incurred when you buy a security. Funds also have management fees. If the fees are too high, this will cut into your returns. That's why it's smart to compare the costs of similar products and buy the cheaper one as appropriate.
9. What are the advantages and disadvantages of the investment?
A list of advantages and disadvantages will help you get a better overview, but don't just count the number of pluses and minuses. If there is just one major disadvantage, it's better to avoid the investment.
10. Do I have sufficient information on the product?
Once you've completed the above items on this checklist, double check before making the investment. Do you still have questions about the product? If so, contact your advisor or get more information.