Investing is a way of creating wealth as well as preserving your purchasing power. However, before you decide to commit your hard-earned money into any investment scheme, you should understand whatever you are doing. Knowing why you are investing and what you are investing in gives you a lot of confidence, clears your doubt, alleviate fears and helps you to make the right decisions. This will mean that you need to ask the right questions but then what questions? This article highlights some key questions you need to ask yourself before you start investing.
I. What is my investment goal?
The most important question you need to ask yourself is “why do I want to invest”? What do I want to achieve? Do you want to invest for your retirement, education, vacations, to buy a car or a building project? Having a goal or purpose for your investment will help you to choose the right investment.
II. What is my risk tolerance?
Risk is the uncertainties associated with any investment. Investing involves taking risk; there is a probability that you will either win or lose. What will be your reaction if your investment loses 5% of its value? If you are very uncomfortable with a little reduction in your investment, then your investment risk tolerance is low, and you don’t need to invest in assets like equities or cryptocurrencies. Investing in government securities (treasury bills or bonds) and fixed income mutual funds may be more suitable. An investment with higher returns comes with a higher risk which means exposure to greater investment losses. Investment with low risk on the other hand may come with lower returns and lower probability of losses. Understanding the relationship between risk and reward can also help you know the difference between genuine and illegitimate investment schemes. Before you commit your hard-earned money into an investment scheme, ask yourself, is the investment returns reasonable compared to similar investment schemes available? Be careful about investment that promises unreasonable and unrealistic returns with little or no risk.
III. How long do I want to invest?
Your choice of investment will defer from person to person depending on the time frame that you are willing to invest. Is it for a short, medium or long term? The longer your investment time frame (for instance retirement), the more risk you can take in your investment portfolio because there is enough time to recover from mistakes and slumps. However, if you will need the money in a few months or years, it is more advisable to opt for a less volatile investment that can be easily liquidated in the short term.
IV. How much am I willing to invest?
Estimate the amount to invest and how often you want investment. It is important that you are deliberate about implementing your investment plan to enable you achieve your goals. To do this effectively, it is advisable to keep an emergency fund in order not to fall on your investment whenever you are cash trapped. You should automate your investment contributions by setting a standing order or direct debit on your account. Take inflation into consideration when investing and increase your contributions whenever your income increases.
V. How much returns should I expect on this investment?
The reason why you are investing is probably for growth and wealth creation. You should have a fair idea about the returns associated with the investment. Is the investment returns realistic, reasonable and competitive compared to similar investment schemes available? What has been the historical performance of the investment and how sustainable has it been? Even though you may not have control over future interest rates, having a fair idea about the investment returns will help you to project the average amount to expect at the end of the investment period.
VI. How often do I need to monitor my investment?
It is very prudent to monitor and evaluate your investment often to check whether you are on track. However, you shouldn’t be so obsessed with your investment that you always have to check the value daily. You need to understand that investment performance is best measured over a medium to long-term. It is also very important to analyze and adjust your investment portfolio regularly according to your risk profile, objectives and financial situation. It is highly recommended to entrust your funds to institutions with expertise and the right professionals.