While there is no one way, or, indeed, a right way to invest, these questions will help you make more make prudent and informed investment decisions.
First things first, investing should help you meet your personal objective.
Keep that thought in the back of your mind when assessing any investment opportunity. Regardless of how exciting, cutting edge or interesting the proposition might be to you, you have to remember what your big-picture goal is and whether this opportunity will help you get there.
I’ve written many times about the difference between the various players in the financial services industry, but whether you invest via a stockbroker, a bank, make sure you get the answers to these questions:
What exactly is being sold?
Investments are products just as much as a car or washing machine is a product. You’d always choose a make and model that suits your circumstances wouldn’t you? It should be no different when it comes to the investment product.
Here’s another thing to be aware of. If you are buying from a broker, stockbroker tied agent, do not confuse the product you are being sold with advice. Any advice you get is a side-show. This person only earns a fee if he or she sells you something. Remember that.
What are the risks?
All too often the brochures promoting investment products gloss over the risks and pass the responsibility to you to get independent legal, tax and financial advice. It is your responsibility to consider the risks. Ask for the Investment Memorandum and go through it forensically, particularly if it’s new technology, or a new investment type. Going back to the car analogy – say you’re considering a Tesla solar-powered car – you’d want to know the risks inside out before you made a purchase.
Where there is no guarantee for your capital, you have to assume that you might lose the entire investment. Can you afford to? Would it destroy your chances of meeting your objectives? If it would, then don’t do it.
What are the exact fees, charges and commissions?
Remember that fees and charges reduce your return, if there is one, so it is very important to know what they are. Fees for investment funds wrapped up by life companies can cost up to 3% per year. If your fund grows by 3%, your net return is nil. Take inflation into consideration, you have now lost money on your investment.
It’s also important for you to know how much the salesperson is making by way of commission. You may feel happy that he or she is being paid a fee by the investment company – it’s not coming out of your fund after all. Be under no illusion; you are paying for these commissions in your fees. How else do you think they are being paid?
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Are there fees associated with early withdrawal?
If you don’t have a rainy day fund and some kind of disaster falls, you may need to access the investment. Is there a penalty for cashing it in, or partly encashing it, prematurely? I would suggest that you subtract a portion of what you were intending to invest and ringfence this as your rainy day fund (three months’ salary as a rule of thumb), so that you are less likely to need to access the investment. It is designed to lock away funds that you will need to serve your future needs, after all.
Is there gearing (lending) involved?
A third-party lender is involved in a geared investment, which increases the level of risk. That third-party could call in the loan when certain circumstances occur. If there is not enough money in the pot at that moment, the investment is gone. Read my blog on AIB’s Belfry funds for a textbook example of a geared property investment gone wrong.
And now a question for you to ask yourself when considering any investment:
How diversified is my portfolio, and what will this investment do to it?
Banks and investment houses usually gravitate towards investments based on current and popular trends, not so much on diversification, with huge repercussions. Make sure you have various asset classes in your portfolio (stocks, property, cash/bonds) and are not overly exposed to any one class.
Within those asset classes, the rule of diversification also applies, so make sure your share portfolio is diversified across sectors and countries, the same with property.
As always, give me a shout if you’d like to discuss any aspect to your investments.