6 questions to ask before Investing

6 Questions to ask before investing

Jan 7, 2024

Investing can be a good way to grow your money and to achieve your financial goals. But investing has its own set of risks. Thus, before jumping into the world of stocks, bonds, ETF's and other investment vehicles, ask yourself a few important questions that can ensure that you have made the right decision for your financial future.

Here are the 6 questions to help you make smart and informed investment decisions.

What is my investment objective?
How much risk can I tolerate?
When do I want to achieve my goal?
Which are the asset classes that I want to invest in?
Do I understand what I am investing in?
What are the costs that are involved with the investment product

1. What is my investment objective

Your objective is the main reason why you want to invest.

What is it that you are planning to achieve with this investment - is it for purchasing a car or renovating your house? Are you investing for your retirement or saving money for your kids' education? You need to determine the amount of money needed to achieve your financial goals.

Your financial goals will also dictate the type of investments that you should consider and the level of risk that you are willing to take.

2. How much risk can I tolerate

Remember that investments involve a certain amount of risk.

If the thought of losing money keeps you up at night, you might want to stick with safer investments. On the other hand, if you are comfortable taking on more risks for the potential of higher returns, then you can consider investing in risky asset classes like stocks. Your risk tolerance determines your willingness to take on risk and your financial ability to bear that risk.

You should assess your risk tolerance based on your personality, goals, income, age, and financial situation. This in turn helps in coming up with a suitable matching investment product.

3. When do you want to achieve your goal

In other words how long do you want to keep your money invested - this is your investment timeframe or investment time horizon.

It could be short-term (less than a year), medium-term (one to five years), or long-term (more than five years).

Knowing the timeframe for your goal will help determine where you need to invest and which investments are suitable for you.

For example, if your goal is less than 3 to 5 years, then you would want to stay away from stock or equity mutual funds. For long-term goals, you might be able to take on more risk and potentially earn a higher return.

4. Which are the asset classes that you want to invest in ?

The answer to this question is dependent on your answers to the 1,2 and 3 above (your goals, your risk tolerance and your investment timeframe).

Different asset classes perform well at different times. Also consider diversifying your portfolio across different asset classes, sectors, and regions to reduce your overall risk.Thus, if one asset class is not doing well during a phase, the other asset might do well, thus provides the required cushion for your investments.

By diversifying your portfolio you will be less exposed to the ups and downs of any one particular asset class.

5. Do I understand how investing works?

If you are new to investing, start your investment journey with simple and low-cost products, such as index funds or exchange-traded funds (ETFs), that track the performance of a market or a sector.

Never invest in something that you do not understand. What works for your friend may not work for you.

Take time to research. Having a rudimentary knowledge of investing and how various investing classes work, is necessary. It is not hard but you need to learn.

6. Understand what are the costs that are involved with an investment product

Investment fees are one of the most important factors in determining how your investment is going to pan out.

Passive investment products like ETF's have lower fees. Active investing strategies have higher fees. Costs are one of the things that is in your control.

There are many ways to get started with your financial journey.

The most important thing is to make informed decisions that align with your financial goals and risk tolerance.

By investing early on, with whatever small amount you have, one can get the benefits of compounding and help accumulate more wealth. Additionally, with a long term investment horizon, we can afford to take more risk with our investments.

Remember that investing is not a one-time activity, but an ongoing process that requires regular monitoring and review. Keep track of how your investments are performing against your objectives and expectations, and make adjustments as needed. Review your portfolio at least once a year, or more frequently if there are significant changes in your personal or financial situation.

Don't forget to share this post:

Subscribe to She Invests

A weekly newsletter filled with money tips & insights, curated for women.

Don't forget to share this post:

Achieve financial freedom early with goal based investing roadmap

Goal-based investing is a powerful strategy that empowers anyone, regardless of income level, to take control of their financial future. This article breaks down the concepts and highlights the benefits. It also provides a clear roadmap to get started, including defining goals, calculating targets, and choosing suitable investments.

Spend Wisely, Save Smart: Practical Tips to Manage Your Money Effectively

Learn how to save money effectively! Explore practical strategies to build healthy saving habits. Discover how to create a budget, set SMART goals, manage spending wisely, and achieve your financial goals. Building a healthy savings habit is your key to unlocking financial freedom.