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5 Questions To Ask Before Investing
1. What are my financial goals?
Before you make any financial decisions, it’s important to decide what your financial goals are and what you are trying to achieve. Maybe you haven’t thought about it yet, but you probably have some goal that will require financing at some stage. So think about it – are you hoping that you’ll be able to afford a down payment on a house in a few years? Are you toying with the idea of further education? Are you hoping to retire early? Establishing your goals is an important task; writing them down or discussing them with a financial adviser will help you work out how to achieve them and put everything in context for you. If it scares you, don’t run from it. Make the tough decisions and be proactive in making plans for your future. It’s the first step towards financial control.
2. Why should I consider investing?
There are two reasonable ways to make money – by working for it and by making your money work for you. While saving your money in a regular savings or deposit account might seem like a sensible decision, if interest rates don't keep pace with inflation your money is in fact losing value. Investing, on the other hand, aims to build wealth and gives you the opportunity to achieve growth and a potential higher return over time than you might get from a deposit account. So just like saving in a deposit account, you can start small, invest a lump sum or regular amounts, but one of the big differences is you are making your money work for you.
3. How much risk am I willing to take?
An important question to ask yourself and one which only you can decide is the amount of risk you are willing to take. This is often referred to as your attitude to risk or investor profile. Essentially, the less risk you take, the lower the potential return on your investments. The more risk you take, the higher the potential return over the long-term. Naturally, there’s also a higher potential for loss the more risk you take so it’s something you need to weigh up.
4. How long am I willing to invest for?
Or in other words, when will I need the money? If you have a short-term financial goal, you might consider putting some money on deposit rather than investing. Low deposit interest rates could however mean that you lose value on your money in the long-run. Having some money on deposit is always sensible for short-term needs but, if time is on your side, investing your money is a smart option. Investing works best when it’s over the long-term. Investment returns can fluctuate more in the short-term whereas long-term returns tend to be more stable. So if you’re willing to sacrifice access to your money for a few years, your reward will hopefully be worth the wait.
5. What do I want to invest in?
There are a number of different investment options such as cash, bonds, property, shares, and commodities. Cash and bonds can be lower risk options but this comes with lower expected returns. Property and shares are the more popular choices for investors as they have greater potential for return. Commodities such as oil, gas, and gold are a much more specialised area but some investment in commodities can often be very effective. There are alternative options and there are ways of combining all of the above (for example multi-asset funds). Don’t worry about knowing everything about the different investment options - financial advisers can help you with this. Make the most of professional expertise and advice. There’s no substitute for talking to a financial adviser who can bring you through everything you need to consider and help you to decide the best option for you.