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Five Questions to Ask Before Making Any Investment Decision

Investing is a complicated game, and there are always many factors to consider before deciding to buy or sell stock or invest in a company.  To simplify the somewhat daunting task of whether to not fire ahead with an investment, you can think in terms of these five key questions:

1. What Does this Investment Contribute to My Plan?

Just as no person, no relationship, functions in a vacuum, no investment should be considered without weighing multiple factors.  An investment shouldn’t be taken solely on its own merits, but rather as a piece of a larger plan, of the part it plays towards enhancing your financial portfolio.  Investments are investor specific.  What’s good for another investor may not be as good a deal for you, depending on the range of industries and other types of investments in your portfolio.  Always remember not to put all of your eggs in one basket, or in this case industry.

2. How Much Can I Find Out About this Situation?

For some, it may go without saying, but it is of major importance that you understand your investment.  If you don’t understand it, you won’t be able to evaluate it as a part of your overall investment plan.  If this isn’t possible, you won’t be able to see it as part of the overall picture of how your goals can be accomplished.  Caveat emptor, buyer beware, is a good rule for any financial transaction.  Do your due diligence.  Find out as much as you can about the company you are investing in.  Is it financially stable?  What is the 5-year plan for the business?  Is there opportunity for growth?  How has it performed in the past?  You can’t ask too many questions or request enough information when it comes to investing your money.  Follow the ways of professional investors such as Farooq Khan, who always do the necessary research to identify and minimise the foreseeable risks.

3. What Risk is Involved with this Investment?

Do your research before committing to an investment.  This means you should always look at your investment’s past performance.  Ask those in the know how volatile your prospective investment is.  Obviously you’ll also ask what kinds of returns you can expect.  You’ll also want to find out if there are any penalties from taking money out of your investment before it reaches full maturity (if such a thing is applicable), or what kind of taxes are involved and when they are owed.  Be careful to understand that while past performance isn’t a solid indicator of future results, it can give you trends.  While five years may seem like a long time in theory, keep in mind that the stock market has been around for much longer and there are always surprises with even that large a data sample.  Any time you invest you take on risk and could lose that investment.  Do not invest money you can’t afford to part with permanently.

4. What is this Investment’s Projected Performance?

This is another area where professional investors such as Farooq Khan spend a lot of time researching before making an investment decision.  If you are curious about exactly how your investment will perform, one solid indicator is cost.  Over the long term, a healthy stock has a healthy price.  Therefore it stands to reason that the higher the price of a stock, the better it will perform.  Obviously this doesn’t do you much good if you are just starting out with a limited source of capital, but this is where your research comes in.  If traditionally solid stocks take a temporary dip, find out why that may be, and research what the future of the company may hold.  If past trends have indicated that a stock may hold steady after a dip, find out how long the dip lasts and invest then.

5. When Do I Say “When”?

Last but not least, be sure to have an exit strategy.  Not all of your decisions will hit, so you need to know at what point will you cut your losses, and at what point will you be satisfied with your gains.  Be sure your investments take as little cost as possible to get away from.  Don’t tie up money without a very good reason, and don’t invest in investments that have hefty penalties for early cancellation without a very good reason.  Generally speaking, mutual funds are friendly in this respect as every day you have the option to get out for only the cost of the trade.  Longer term investments such as some insurance policies aren’t as safe as they carry hefty penalties should you wish to cancel.  Your mileage may vary, though, and as mentioned before, it is always important to do your research on the specifics of these and all investments before committing your money to them.  Happy investing!

This article was written by financial and investment journalist, Daniel Johns.

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