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8 Questions to Ask Before You Invest
12/11/2019 11:34 am EST
Investing can be daunting, here are eight questions to ask before you commit funds, says Nick Bhargava.
In 2018, the overall economy performed very well. Despite the end-of-year slide in the stock market, housing values soared, unemployment was down and consumer confidence remained high through the holiday shopping season. With these strong fundamentals in the economy, there’s more competition from banks, investment platforms and financial advisors to get a hold of your discretionary savings. That’s why you’re likely receiving more direct mail about cash bonuses for opening up new bank accounts as well as lots of emails and ads about trying out a “better” way to capitalize on economic gains.
When firms are competing for your money, they roll out all the stops. You’re able to take advantage of promotional offers that usually translate into some form of cash benefit, such as free transactions, sign-up bonuses or overall fee reductions. While these benefits may seem like a benefit, it’s important to look past these shiny objects and keep your focus on the overall investment value. Here are eight questions to keep in mind as you weigh the pros and cons of every investment opportunity.
1. What is the anticipated return on your investment?
No one has a crystal ball, so you can’t be 100% sure, but this is always one of the best questions to start with. Many investment opportunities will state anticipated rates of return to give you a good gauge of the earnings potential. However, a good rule to follow is, for better rewards, there is more risk involved.
2. How long will it take to get that return?
Is the investment short-term? Or do you need to wait several years before you realize any return? Like overall return, there is no guarantee on the timing, but there should be a logical strategy. Whatever the answer, you’ll need to make sure that the time horizon works for you since you will not have that cash on hand until the investment matures. Withdrawing an investment early can often result in steep fees — if it’s possible at all.
3. What is the level of risk with the investment?
All investments carry some form of risk. And typically, the more risk involved, the greater the return. It’s important that you’re clear about the overall level of risk to make sure it’s aligned with your risk tolerance. If you cannot afford to lose some or all your principal investment, high-risk investments may not be for you. Generally, fixed income, especially from asset-backed or guaranteed investments, is most appropriate for the risk-averse.
4. What protections are in place if the investment takes a turn?
When you’re trying to understand the level of risk, it’s also important that you consider what protections are in place if the investment goes south. For example, is the investment backed by some kind of asset? Does the investment issuer or manager have an asset recovery team that can help recoup some of your principal? These are very important questions to ask before, not after.
5. Are you receiving audited financial statements?
Registered asset managers and issuers must disclose how they are making their money, and there should be some correlation between the assets under management or investment performance and the reported revenue. Looking at the audited financial statements can help answer questions about the investment performance, and can serve as a vetting mechanism to protect against fraud or mismanagement. Depending on the investment, the manager may be regulated and subject to oversight/registration by regulators and self-regulatory authorities who can help with due diligence by offering best practices and a file of managers that have received complaints.
6. How are you getting updates about the performance of the investment?
You should be receiving monthly updates to ensure your investment is on track or to notify you if something is not performing. Communication should be frequent and transparent. This is the new normal, and if an investment can’t offer this basic information, it could be a red flag.
7. Who is making the decisions about the investment strategy?
Are you ultimately making the decisions about each investment, or are you entrusting someone else to do it for you? If it’s the latter, how much experience do they have, and what has been their past performance? One thing to keep in mind is that it may seem daunting to make investment decisions yourself, but there is now a bevy of information online to walk you through the process. In many cases, you can try certain investment products with smaller amounts before committing appropriately. As noted in #5, certain self-regulatory authorities may have a data based on managers that list past complaints.
8. What fees are associated with the investment?
If you are allowing someone else to make decisions about your investment, you’ll have to pay fees. Even if your investment is self-directed, you may still have to pay fees associated with your investment. You’ll want to find out what those fees are and when they are collected in advance of committing. If it’s a percentage of performance, you could be shaving off quite a bit of the overall ROI. Regardless, the fee structure should be clear and understandable—there should be no surprises after you commit funds.
Remember, there are no stupid questions when it comes to your own financial management. So, it’s always better to ask before or during the process and not afterward.
Nick Bhargava is Co-Founder and EVP of Groundfloor, a real estate investing and lending platform that is open to non-accredited investors.
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