Questions to Ask Yourself Before Investing

When it comes to investing, everyone has an opinion. People can take guesses as to what stock is going to take off, which company will outperform the others and where you should place your money to do well. It can be confusing.

While there is no surefire way to approach the stock market, there are a few questions you should be asking yourself before you invest money anywhere. What investments will be good for your personal goals? Which investments will show a nice return?

I found an interesting article on Mom and Dad Money about what you should be looking for when making investments. If you ask yourself the following questions before placing your money in the stock market, they may help you make better decisions when it comes to choosing what to invest in.

Do you understand?

A stock market decision could sound like the most attractive option, but if you don’t understand the decision you are making, it won’t make a difference. If the person explaining your stock options to you can’t explain it in a way that you can understand, don’t invest. Understanding what your investment is and what it may do is key to sticking it out through good and bad, which is the hardest part of investing. Without a good understanding of your investment, you may be more likely to bail at the first sign of trouble (and that could cost you a pretty penny).

Does it fit your plan?

Set a personal goal for your investments. Once you’ve put your personal investment plan into action, you will know what you should invest in. Bloggers at Mom and Dad Money, LLC compare this decision to food. “Imagine making a meal by throwing all your favorite foods into one big pot…. adding them together would probably be pretty gross.” The same goes for investing. You don’t throw together a bunch of great investments, you pick investments that will work well together. For instance, if you have some higher-returning investments in your account, they are more likely to have down moments. Your more conservative investments in your portfolio will even out the down time. This will provide a lower return in the long run, but it will provide balance (if that is what you are seeking). Just make sure your investments fit your overall plan.

Investing takes time, do you have it?

Warren Buffett once said, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” With the mass amount of information about the stock market available, it is easy to want to make short-term investments. Investors who succeed in the stock market are investors that put their money into a company or stock that they want to hold forever.

Have you done your research?

Making an investment is a big decision. You will want to do plenty of research prior to making a decision. What is the company’s track record? What kind of data do they have to back up their findings? If you talk to someone and they simply talk about projections and back-tested returns, run! These are predictions and guesses as to how the company or stock will do in the future, they are not for-sure. Invest in something that has a good track record and not just predictions.

Do you understand the risk?

There is an inherent risk when investing. For instance, if you place your money with one company, the company could go bankrupt and you could lose every cent you invested. You can place your money in a diversified portfolio, but you will likely have a smaller return. However, when it comes to deciding which company or stock to place your money, always choose the option with the smaller downside. Again, this will all depend on your personal investment goals.

Are you planning ahead?

If you are looking at investing, you are likely planning ahead for something. However, you have to think ahead in terms of the stock market. Ask yourself if the investment will be easy to get out of if you need to pull your money out. The easier it is to get out of, the less overall risk there is. Also, question whether or not you need to open the new investment. Is your stock portfolio fine the way it is, considering your personal goals?

Bottom line when it comes to investing is to do your homework and make sure your personal needs are being met. Happy investing!

Photo: Flickr: GotCredit