6 Questions To Ask Before Investing
“If you treat Investing like a casino, it’s going to treat you like a gambler”
I had a sit down chat with a financial advisor/ wealth manager from a popular brokerage firm to answer some burning questions about investing. He has chosen to be anonymous in this blog post as we did not have enough time to get these questions and answers approved by his firm. However, he has guaranteed that all answers are truthful and based on general knowledge that anyone can google. He has also given me permission to give his contact information (via email) to my readers who are interested in learning more about investing.
Whether you’re a first-time investor or have been investing for many years, there are some basic questions you should always ask before you commit your hard earned money to an investment.
Q: What would you recommend as a starting point for a new investor?
A: For someone just starting out I would recommend they get an understanding of money and how it works. They have to determine their goals and their risk tolerance to market volatility. For example, certain types of bond funds can counterbalance market volatility so a starting point could be with bonds. Next, they have to choose an advisor that will put together a program designed to accomplish those goals .
Q: What is a recommended portfolio diversification for a beginner i.e percentage of stocks, bonds, mutual funds, etc?
A: This is a nuanced question and depends on the person’s time horizon. For example, if you’re a 25 year old planning to use the money as a down payment on a house in 5 years you may be better suited with a larger portfolio of bonds. The short answer is, if they are investing for the long term they are going to see more growth in blue chips and mutual funds that pay rising dividends over time. See JP Morgan’s Guide to The Markets - Time, Diversification and the Volatility of Returns.
What this shows is the 1, 5, 10 and 20 year return going all the way back to 1950 of a pure stock portfolio, a pure bond portfolio and a 50/50 mix. There isn’t a 5 year period in that 70 year history where there was a loss of money with a 50/50 mix. The worst that happened in any 20 year period is that you quadrupled your money. So, the suggestion would be if they’re investing for the long term invest in companies that provide basic necessities for our way of life and go with a 50/50 mix.
Q: What factors determine how you will invest someone’s money and do things like age and risk tolerance play a role?
A: There are many factors that play a role when it comes to someone investing. Things like:
How involved the person wants to be with their investments, i.e hands on versus hands off approach
Time horizon, not so much age. For example, if they are 70 years old but they are investing for their grandchildren’s legacy then age doesn’t matter.
Risk Tolerance
Tax considerations
IRA account versus Taxable brokerage account
Tax efficiency
Tax harvesting strategies
Q: How do you manage investment accounts for taxes?
A: Generally , there are 3 ways to invest money for taxes:
Taxable (pay as you go)
Tax deferred (Traditional IRA, Annuities)
Tax free (Roth IRA, Insurance products)
Q: What is your approach to financial planning?
A: I approach it as a process and it should be the same no matter who the individual works with
Get a feel for who they are, what they want to accomplish and why
Determine where they are coming from, their psychology about money, their values and their belief system around money and investing.
Ask them to quantify this as much as possible, in terms of their goals for the account, their psychology about risk
Tax needs
Risk tolerance
Are goals realistic
Am I a good fit for them and vice versa
Based on the above , I will then go through the courses of action and next steps. I will be transparent about:
The cost structure of each option
The degree of involvement each party needs to have for each option
Fees for services
I will then set up a periodic review for each account, i.e monthly, quarterly or annually.
Q: What are some important questions a client should ask their financial advisor before investing?
A: This is probably one of the most important questions.
How is the plan in the client’s best interest
Explain cost structure
Discuss any potential tax considerations
The various risks associated with the investment. Every investment has risks. There’s no such thing as a risk free investment
Describe in full the process of beginning this journey
If the advisor is unable to answer any of the above to the client’s satisfaction, they should exercise caution before proceeding.
If you would like to learn more about Investing or begin your own Investing journey with this advisor, feel free send me an email below and I will forward his info: CONTACT ME
This is Part IV of The Investing Series. Click here for Part III, Part II, and Part I.
Our investing series will continue in our next article on the topic of Real Estate Investing. Sign up below to receive the Investing Series directly to your inbox:
This article is for educational and informational purposes only. Contact a financial advisor before making any financial decision.
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