Questions To Ask Before Investing

Investment cuts both ways – good decisions can make investors wealthy, while poor ones can wipe them out.

Newer investors or those considering asset classes, markets, or products they are unfamiliar with should ask as many questions as necessary to have confidence in their decisions.

Successful investment relies on sound judgement, ongoing monitoring, and decisive action. It can produce returns multiple times those you might expect to make on cash sitting in a savings account.

However, every investment carries risk. A thorough understanding of those risks and the balance between exposure and potential gains is essential to ensure your investments align with your aspirations, expectations, and available capital.

Is The Investment Risk Appropriate For My Needs?

A general rule of thumb is that you should only invest as much as you can afford to lose. But, there are low-risk investments with a lower earning potential but little likelihood of losing your stake money.

The challenge is that conventional savings products also provide a near-zero loss risk. Still, the gradual deprecation of your savings value due to inflation means your money becomes worthless over time, with inflation often much higher than the interest earnings available.

Eroding your wealth through passive savings can be a risk in itself. The Bank of England Inflation Calculator gives a rough idea about how inflation impacts purchasing power. For example, something costing £10 in 2003 costs £16.84 today.

Likewise, a household appliance costing £300 in 1990 would now cost just under £600. This demonstrates why holding money with minimal interest earnings can make a loss and reduce the real-world value of your savings.

Investors should be conscious of the risk vs reward calculations and work with an experienced, reputable, and reliable investment manager to ensure your forecasts, predictions, and market analysis are accurate and made on a sound basis.

Volatile investments that promise extraordinary returns, such as cryptocurrencies, have proven to be highly speculative, with the potential to lose the entirety of your invested capital in one market downturn.

Can I Exit The Investment Quickly If Needs Be?

High-yield savings accounts illustrate some investors’ difficulty in choosing a low-risk and moderate-return product, with the caveat that they need to pay a fee or wait several weeks before they can access their cash.

If you have no other savings or contingency funds and need to cover an unexpected cost or emergency, tying all your funds into an investment could be a significant issue.

Most investments are medium-term and run for around five years. However, you can invest for substantially longer or even several decades as a long-term investment strategy to accumulate gains towards retirement.

Either way, you must understand how the investment product works, when it ends, and if or how you can withdraw your money, sell the investment, or exit the position when you need to.

You should be aware of the following details:

  • The nature and contractual conditions behind the investment product.
  • The issuing party, company or financial institution.
  • The terms on withdrawal, early redemption or waiting periods.

Higher-risk investments are normally suitable for seasoned investors. Those with less expertise, a smaller amount of capital, limited understanding, or a lower risk tolerance are better advised to choose more stable, lower-risk alternatives.

Is This Investment Product Or Provider Regulated?

The Financial Conduct Authority is the UK regulator. Any reputable investment broker or manager should be registered and authorised to ensure you are covered by consumer protection rules, including dispute resolution procedures and mis-selling regulations.

Investments deposited in unregulated accounts are normally unprotected without access to the Financial Services Compensation Scheme (FSCS), which covers up to £85,000 per individual, per financial institution, in the event of bankruptcy or default.

It is strongly advisable only to consider regulated investments, advisers, and brokers, since unregulated activities may be unlawful or without any safeguards.

The higher the risk of the investment, the higher the potential likelihood that the issuing body or adviser will go out of business, leaving you exposed. Although investments sometimes fail or perform poorly, without recourse, there are protections against your losses if a regulated issuer becomes insolvent or ceases to trade for any other reason.

Considerations Before Making An Investment Decision

Alongside the questions to ask your adviser or issuing provider, you should also consider other objectives and benchmarks before making any investment decisions, whether long or short-term.

What is my investment target?

Every investor should know what they are hoping to achieve – perhaps funding retirement, buying a property, relocating overseas, or paying for their children’s education. Setting goals is important because this creates a baseline to determine the ideal investment in terms of:

  • Timeframes
  • Returns
  • Risk

Investment advisers work backwards, establishing your aspirations and how much you have to invest and then suggesting products that will produce the profits you hope to achieve within your anticipated timescale.

How long do I want my investment to run?

Most investments are medium to long-term, but the correct duration of your investment will depend on the benchmarks you have established. Longer-term investment is normally best suited to larger, gradual, low-risk returns, used to save for requirements at least five years in the future.

Investments over multiple years, or decades, are ideal for retirement funds, where overall performance is more likely to balance out minor blips in price performance.

Anything with a shorter target withdrawal date is considered short-term, with products designed to crystallise within three years.

How much risk am I willing to accept?

Risk tolerance is a key theme in investment, and there is no right or wrong way to gauge the amount of risk you are prepared to absorb in return for the profits on offer. Generally, an investment product with higher-than-average returns is also riskier.

For example, a mutual fund might be attractive because the returns are higher than a fixed deposit. However, because the fund value is linked to an underlying market, there is a larger element of risk.

Investors can take high-risk positions but normally allocate a small proportion of their investment portfolio to these assets or take counter positions with other assets to offset the risk.

How diversified are my investment assets?

Finally, you need to know where your investment funds are located, in what products, and in what asset classes. Diversification avoids putting everything in one place and provides a cushion against losses.

Having everything invested in one asset class can be very high risk, even if the individual investment products are not considered particularly volatile. However, if the market, sector or company collapses, or the stocks become devalued, your entire investment portfolio could become worthless overnight.

An experienced investor adviser will recommend diversification as a standard requirement to avoid this level of risk.

Questions To Ask Before Investing FAQ

Why do I need an investment target?

The objectives behind your investment will drive your decision-making. For example, if you want to invest to grow your wealth and finance your children’s university fees, this helps work out when you need your investment to end and which products will produce the required returns.

Investors establish strategies based on their original targets and expectations. They follow these strategies regardless of trends or short-term movements to provide stable, reliable returns without the temptation to make knee-jerk reactions inconsistent with their overall aims.

Are unregulated investment advisers illegal?

It depends on where they trade and what they are offering. Still, in most cases, an unregulated adviser or broker is acting illegally if they are advertising or selling an investment product to a person within the UK without FCA authorisation.

Unregulated investments have no protection and could result in a total loss of your invested capital if the provider collapses, defaults, or stops trading.

Why is diversification important in investment?

Diversification means you invest in a range of products, sectors, or assets – rather than putting all your capital into one investment and exacerbating your losses if things don’t go your way. Asset classes behave differently depending on market performance and a huge range of factors, so diversifying provides balance and reduces risk.

Why is my choice of investment adviser important?

Unless you have a trading history or are an experienced investor, you will likely rely on an adviser to track your portfolio, recommend changes, or suggest investment products aligned with your goals.

Fees and fund management charges also vary considerably. Hence, it is essential to research your selected adviser thoroughly and be confident that they will act quickly and in your best interests.

Do I need to be an expert to invest?

No, anyone can invest, provided they put some time and effort into learning about the markets or products they are interested in or commission a trusted adviser to steer them through each decision-making process.

There are thousands of potential investment products, structures, and assets, so professional advice is advisable to ensure you don’t make assumptions to the detriment of your long-term wealth.

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