Since one person’s good investment choice may be a huge mistake for someone else, what factors should you consider when deciding upon a potential investment?
In investing, the only hard and fast rule is that past performance never guarantees future returns. Though you should try to understand why a security acted in a specific way in the past, the most important thing you can do is make sound decisions based upon your personal situation. To help you make an even clearer decision, use an investment evaluation tool, like the one here: Profile-Financial.com/investment-evaluation
All too often, folks lose money as a result of not asking the right questions. So, when deciding what to invest in, ask yourself:
What is your net worth?
Before you invest your money, you need to know how much money you have now. This doesn’t only refer to savings, but also to other assets such as real estate and collectibles (if you would ever consider selling them). Knowing your total net worth helps you create an asset allocation model and understand how the new investment would fit in your big picture.
What is your tolerance for risk?
Risk tolerance is very individual. If you are close to retirement, your risk tolerance level may be lower than that of a younger person because you have less time to recoup any potential loss. Sometimes even younger folks don’t have the stomach for market volatility and they need to choose more conservative investments, too.
What is the purpose of the investment?
Are you investing for growth, to maintain your principal, or to generate income? Growth investments increase your wealth through long- or short-term appreciation. These investments include mutual funds and various types of stocks. Income investments, on the other hand, generate steady income through interest or dividend payments. Examples include dividend-paying stocks or bonds. An income investment may not be suitable for growth investing, and vice versa.
To find out what other questions you should ask before making a financial decision, use our free investment evaluation tool: Profile-Financial.com/investment-evaluation
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published May 22, 2017. Updated December 2020