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5 Questions to Ask Yourself Before Investing

August 13, 2014

DailyWorth Expert

Financial Planner for Young Women & Couples. Money Made Easy, Life Made Richer.

leahmanderson.com

Five thousand dollars. That’s how much Emma was ready to invest.

Or so she thought.

When it came time to commit, she was acutely aware that rather than grow, it could shrink. Even after all the research — and knowing that this was a step into financial adulthood — she had the urge to hold onto her money even tighter.

What if she overlooked something? Had she really thought this through?

Days later, having lost her nerve, the cash sat in her savings account and she was even less sure about what to do.

Sound familiar?

The process of picking the right-for-you investment opportunity can make your stomach drop.

But there’s a way to ease the anxiety. To start, run through the following checklist of questions. If you can answer a resounding “yes!” to each of them, you can feel confident knowing that you’re making a smart financial decision.

1. Do you have your ducks in a row?
Investing without a savings cushion is like building a house on mud. Before investing, you want to have a solid financial foundation. That means that you’ve nixed high-interest debts (like credit cards!) and you have savings set aside to get you through life’s unexpected turns.

2. Do you know your investing personality?
Your investing personality is also called your risk tolerance. How much risk can you tolerate to get the returns you want?

In general, riskier investments can give you higher returns in the long run. But those returns can have wide swings from year to year. If you can stomach the roller coaster ride, you’re an aggressive investor.

Less risky investments are more predictable, but typically offer lower returns. If you’d rather ride the investment merry-go-round, you’re likely a conservative investor.

Most people fall somewhere in the middle, and it’s important to pinpoint exactly where that is for you.

3. Do you have an investment plan?
A successful investment takes into account your goals, savings and risk tolerance. The investments you choose should fit like a puzzle piece into the plan.

4. Do you really “get” the investments you’re looking to buy?
You should never invest in something you don’t understand.

If you’re unsure how an investment works, take the time to do some research.

If it’s a stock, take time to learn how the company makes money. If it’s a mutual fund, make sure you understand the strategy of the fund. And, above all, know how it fits into your overall plan.

5. Should you invest on your own or hire an investment planner?
If you can easily say “yes” to the questions above, you can probably invest on your own. You have a foundation and a plan, and you understand how your investments fit in with your goals.

If you’re unclear on the concepts above, or how they apply to you, you may want to hire a financial planner. They have the skill and judgment to recommend good investments and educate you on specific investing concepts.

Whether you choose to go it alone or hire an expert, it’s important that you can answer all of these questions with confidence. With this knowledge in mind, you can make smart decisions for life.

Leah Manderson is a member of the DailyWorth Experts program. Read more about the program here.

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