If you’re anywhere near retirement, you don’t want to unnecessarily risk what you’ve saved. So before you invest, ask yourself these key questions.
1. Do I understand what I’m investing in?
Products offered to come in all shapes and sizes. Remember that you should understand how your investment works – and not in a superficial way.
Find out how it’s supposed to earn money for you, how much you should expect to receive, and under what conditions it would either not earn that amount or would lose its value.
2. How risky is this investment for me?
Part of an investment’s risk relates to how its earnings and value fluctuates with market conditions. Interest rate increases depress the value of a bond you own. Stocks will generally respond to significant market trends. Bank deposits give low but reliable interest earnings.
Determine how vulnerable you are too basic market risks. If you require an income you can count on and need access to your money, then stay away from investments that can easily fluctuate with the market.
3. What if the company goes bust?
Certainly, stocks and bonds can become worthless if their associated company goes down.
Some investments carry guarantees that prevent the complete loss of your investment. Bank deposits and CDs carry FDIC insurance. Insurance products often have private insurance against a company unable to pay its obligations to you. These guarantees are limited, though.
Ask what assurances there are for you to recover your investment if the company handling it goes bust. For investing in an insurance product, check the current rating of the company. Know all the limits.
4. What are all the charges?
If you buy a stock or bond, the charge to participate in its investment performance is the brokerage fee to buy and sell it. But all other investments such as mutual funds or ETFs, are offered by an intermediary. They buy the underlying stocks or bonds then sell you a share in their own fund. They make money by charging you fees.
Insurance companies create their own products. The unique ‘assurance’ they offer you with their product is principally supported by fees.
Ask what all the fees you’ll be charged with are. Then determine how much those fees will cut into the expected performance of the product. Fee structures can be deceptive.
5. What are the tax implications?
Our tax system significantly affects our overall investment return.
Determine when and how your investment will be taxed. Will it be taxed as ordinary income or taxed under favorable rates associated with capital gains or qualified dividends? Finding the answers to these questions before you invest in your best investment. That’s because due diligence will pay returns and prevent losses that hunch, guesses, and rushed investing will not.