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  • The one question we get asked the most is probably, "What should I invest in?”

  • And we're tempted to share hot tips about *#&%&#** and #[email protected]!*

  • Seriously, put your money there and you can't lose.

  • But instead, we usually just say, "It depends.”

  • Investing should always be looked at through your personal context.

  • What might be a sound investment for your bestie might be totally inappropriate for you.

  • So if you're considering dipping your toe into investing and wondering where to start, the first step is to ask yourself 5 important questions before putting any money on the line.

  • When confronted with an investment opportunity, most people wonder how much money they'll make, when the more appropriate question is, "HOW MUCH AM I WILLING TO LOSE?”

  • If you have a thousand dollars to invest, how would you feel if you lost a hundred of that.

  • Two hundred?

  • Five hundred?

  • Now, if the thought of losing money at all makes you sweat a little, you're not alone.

  • "Loss Aversion" is the term psychologists use for our tendency to fear losses more than we enjoy gains.

  • It's why many investors sold off their holdings during the market crash of 2008.

  • They overestimated their risk tolerance when times were good, and ended up selling at a loss when the seas got stormy.

  • Knowing your personal threshold for this loss-pain (even short-term) is a great start to knowing what kind of investment is right for you.

  • The second question you should ask yourself is what is the goal or purpose of this investment?

  • Is it for your retirement?

  • For your child's college?

  • A trip around the world?

  • Each of these goals probably has a completely different time-scale.

  • If your goal is far into the future, you could probably handle a more aggressive long-term investment option like the stock market or real estate and take on more risk.

  • That way you can leverage the longer time-line and put yourself in the position to receive the maximum reward while also allowing yourself space to recover from a recession.

  • But if you are just a year or two from your investment goal, a dip in the market might mean you can't afford to pay for that goal. So you're probably better off sticking with something less volatile, like a CD or a bond fund.

  • One of the habits in Stephen Covey's classic "7 Habits of Highly Successful People" is "Begin with the end in mind."

  • And nowhere is this more true than in investing.

  • As you consider your goals, you should ultimately make a decision on the circumstances that would lead you to selling the investment.

  • This helps you avoid selling in a panic or hopping from one "greener pasture" to another."

  • For example, you might decide that you plan to own an investment for at least 10 years.

  • Or that you'll get out if the investment loses 10%.

  • Knowing these details in advance will help you both pick an investment with realistic goals, and help you keep your head if the news headlines get hysterical.

  • It's okay to allow your rules to be a little flexible, but having no plan at all can lead to your decisions being driven by emotions like greed, fear, or panic.

  • Many brokers and investment companies are notorious for hiding fees or making them super complicated.

  • So it can be tricky to figure out exactly how much an investment cost.

  • Sometimes there's a simple one-time feelike a stock-trading service that charges per-trade.

  • Mutual funds and index funds, on the other hand, charge you a percentage of the money you invest every year, and perhaps even an extra sales charge in the form of a "front-end-load."

  • An investment advisor will typically add an additional fee-layer for the service.

  • So if you hire one, be sure they're providing plenty of value.

  • Even investment options that appear to be free, like CD's and high-yield savings accounts come with "opportunity costs.”

  • They're re-investing your money into higher-paying investments and pocketing the difference.

  • Free investment apps like Robinhood generate income by earning interest on whatever cash you have in your account that isn't currently in an investment.

  • To be clear, paying a price to invest isn't bad, or even something you can always avoid.

  • Just make sure you know what you're paying so you can decide for yourself if you're getting your money's worth.

  • It would be fine to put all your money on a single roll of the dice if you could be certain of the outcome.

  • But in the real world, there's never a sure thing.

  • Spreading your assets out and avoiding over-concentration can help ensure that your fate isn't in the hands of any single company, sector, or industry.

  • For example, let's say you have most of your savings in the stock of the company you work for.

  • What would happen if your employer suddenly went belly-up?

  • You'd not only be out of a job, but that money you were counting on for retirement could evaporate.

  • A financial advisor might recommend selling off some of that stock and diversifying elsewhere, like buying a home or opening up an IRA.

  • Remember that 2008 crash?

  • Many people had the bulk of their net worth tied up in their homes and couldn't afford to ride out the storm.

  • Balance is key.

  • So whenever you're trying to decide on a new investment, consider how it relates to the rest of your assets.

  • If there were a one-size-fits-all that worked for every person in every situation, it would make our job a lot easier.

  • But picking the right investment doesn't have to be as overwhelming as you might think.

  • Asking yourself a few basic questions can go a long way to simplify which choice is best for you no matter what surprises might be around the corner.

  • And that's our two cents!

  • Thanks to our patrons for keeping Two Cents financially healthy.

  • Click the link in the description if you'd like to support us on Patreon.

  • We want to hear from you!

  • Tell us the story of your first investment in the comments.

The one question we get asked the most is probably, "What should I invest in?”

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5 Questions To Ask Before Investing

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    Mackenzie posted on 2019/11/22
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