Forget the hype. The smartest investment is one that fits your goals, your timeline and your tolerance for risk.
Every day, investors are bombarded with opportunities, whether it is a stock that is soaring, or a new fund which is attracting everyone’s attention. Maybe it is a friend who has made money from a particular investment. Even today, our various social media platforms, are full of predictions about the “next big thing.”
We should all note that investing successfully isn’t about chasing whatever happens to be popular. It is really about finding investments that make sense for you, and your unique space. The investment that is perfect for one person may be completely wrong for another. That’s because the right choice depends on several personal factors.
These factors will need to include your financial goals, how long you plan to invest, how much risk you can handle and whether you actually understand what you’re buying.
“The goal isn’t to find the investment that promises the biggest return. It’s to find one which you can understand, afford and stick with.”
Start With the Why…
Before choosing an investment, determine exactly what it is that you are trying to accomplish. Is it that you are building wealth for retirement? Saving for a home? Funding your child’s education? Or simply trying to grow money over the long term?
It is your specific answer to these questions, can help to determine the types of investments worth considering for you. For example, someone investing for a goal that may be several decades away may have more time to withstand market ups and downs. In comparison someone who expects to need the money within a year or two may have much less room for any significant decline.
Your goal determines your destination, and your investment strategy helps determine how you get there.
How Much Risk Can You Really Handle?
Risk is an unavoidable part of investing. An investment may have the potential to generate attractive returns, but it can also lose value. The important question is whether you’re financially and emotionally prepared for those losses. What is your tolerance level?
Imagine checking your investment account and discovering that its value has fallen by 25%. Think about what you would do.
– Would you stay calm, and follow your plan? or,
– Would you immediately want to sell?
There is no shame in choosing a less volatile investment. In fact, understanding your own reaction to risk, can help you avoid making emotional decisions when markets do become turbulent. Risk is not only just about numbers. It is about behavior… Your own behavior.
An specific investment isn’t necessarily right for you, if its volatility is likely to make you abandon your strategy at the worst possible moment.
If You Don’t Understand It, Don’t Buy It
Yes, it is that simple as well. Investment products can be complicated at times. Some may involve sophisticated strategies, complex fee structures or even risks that aren’t obvious at first glance. You do not have to become a financial expert before investing, but! You should understand the basics.
Be Sure To Ask Yourself:
- What am I buying?
- How could I make money?
- What could cause me to lose money?
- What fees will I pay?
- How long do I expect to hold it?
If you can’t answer those questions, consider doing some more research before committing your money.
Do Not Put All Of Your Eggs, In One Basket
Diversification is one of the fundamental principles of investing. Rather than relying heavily on a single company, industry or asset, diversification spreads your money across different investments. This can effectively reduce the impact of any one investment performing poorly, but balances that against others that may be doing ok.
For many investors, diversified funds can offer a relatively straightforward way to spread risk, but that doesn’t mean diversification eliminates losses. It doesn’t.
But it can help prevent one bad investment from becoming a financial disaster. We think of it like how a spider has many legs. If one leg becomes damaged or broken, there are still several other legs that the spider can use to get around.
“Diversification can’t guarantee that you won’t lose money. It can help make sure one mistake doesn’t determine your entire financial future.”
Look Beyond the Return
When comparing investments, it’s easy to focus on just one number, and that number being the potential return. However the return is really only part of the equation. You must also consider the costs, too. Depending on what you are investing in, you could encounter management fees, fund expenses, commissions, trading costs or other charges.
Over many years, even seemingly modest costs can reduce the amount of money you ultimately accumulate. The lesson isn’t that the cheapest investment is always the best, but it is that you should understand what it is that you are paying for overall.
Beware of the Hype
One of the biggest challenges for investors isn’t finding information. It’s filtering it. Markets regularly produce stories about spectacular gains. Those stories can create a powerful fear of missing out, and an investment that has already surged in value isn’t automatically a good investment for you.
Instead of asking: “How much has everyone else made?”
Ask: “Does this investment fit my plan?”
Recent performance, celebrity endorsements and social-media excitement should not replace careful consideration of risk, valuation, diversification nor your own financial circumstances.
Here’s Your 5-Question Investor Check
Before you invest, ask yourself these five questions:
- What am I investing for or to achieve ? Know the goal and when you’ll need the money.
- How much risk can I realistically handle? Think about both your finances and your emotional response to losses or gains.
- Do I understand what I’m buying? If you can’t explain the investment in simple terms, learn more about it first.
- What will it cost me? Look beyond the advertised return and understand the fees and expenses.
- Does it fit my overall portfolio? Consider whether the investment gives you appropriate diversification rather than concentrating your money in one area.
A Good Investment Is Personal
There is no universal answer to the question, “What’s the best investment?” The better question is: “What’s the right investment for me?” and the answer depends on your circumstances. A sensible investment choice should align with your goals, timeframe, risk tolerance and broader financial plan. Most importantly, it should be something which you can hold through the inevitable periods when markets don’t behave the way that you hoped. Investing isn’t about predicting the future perfectly.
It’s about making informed decisions today, while giving those decisions enough time to work.
The smartest investment may not be the most exciting one. It may simply be the one that fits you best.
Please also be minded that as your circumstances change, so can you. Its just starts with a chat with your financial advisor as well in order to map out your path at this specific point in time in your life.
Editor’s Note: This article is for general educational purposes and should not be considered personalized financial, investment or tax advice. Investment values can rise and fall, and past performance does not guarantee future results. Consider your individual circumstances and, where appropriate, consult a qualified financial professional before investing.