9 Crucial Questions Every Investor Needs to Ask

Investing is a skill, and like any other skill, it can be learned. However, with seemingly limitless investment vehicles in the market, it can be tough to ascertain the right way forward. From real estate to stocks and bonds, there are a number of options to choose from. Each of these caters to a specific need and goal. Hence, you may often wonder which route to take and how and where to invest your money.

These investment questions are bound to arise in your investment journey. However, it is important to make the best decisions that will help you achieve your financial goals. This can be achieved with a solid foundation and complete clarity of the basics of investing. After all, understanding yourself as an investor marks the difference between being prudent and simply speculating with your money. Consider consulting with a professional financial advisor who can help create a financial plan and investment portfolio for you to achieve your financial needs and goals.

Here are 9 questions to ask your advisor when investing

1. How much of my income should be going into investments?

The answer depends on factors like demographics, tax brackets, and your financial situation. According to most experts, investing a fixed percentage of your post-tax income is the right way to go. Ideally, this can be anywhere between 15% and 25% of the amount, but it can look different based on your debts and other financial obligations. For some people, even 10% can seem like a lot when starting out or burdened with responsibilities. In this situation, it’s important to think of investing as a habit and decide on any amount that’s feasible for you to invest every month. Even a small amount invested with consistency can yield a significant return, thanks to the power of compounding. Typically, setting a monthly investment amount requires you to calculate non-negotiable expenses such as bills, fees, rent, debt repayments, and so on. Of the remaining amount, you can set aside a percentage for your emergency fund in case it holds less than three to six months of your salary. With the leftover funds, you can aim to prioritize investments over your wants. At the end of the day, knowing how much to invest is all about balancing your financial priorities.

2. What are the best assets to invest in?

This is one of the most common investment questions that even experienced investors ask. People tend to have different approaches based on their risk tolerance and financial objectives. Those who want to play it safe can choose among assets like certificates of deposit (CDs), which are issued by banks at higher interest rates than most savings accounts. These can be a suitable choice for risk-averse investors or retirees who do not require immediate income and can afford to set some money aside for a period of time. Government bond funds, which are Exchange-Traded Funds (ETFs) or mutual funds that invest in debt securities, are another. They’ve been performing especially well in recent months, owing to a surge in interest rates in 2022.

If you’re hoping to diversify your portfolio and gain exposure to the stock market, an S&P 500 index fund can be prudent. Since it is constituted by 500 of the largest and most successful American companies, the risk is relatively lower than other types of stock funds but higher than bonds or bank products. The same goes for a NASDAQ-100 index fund, which invests in the biggest tech companies that have high valuations and are susceptible to downturns.

From mutual funds and government securities to real estate and cryptocurrency, investors are faced with a sea of choices. What works for one person may not for another, so it’s necessary to evaluate instruments from the lens of personal factors like risk appetite, investment horizon, how much you can invest, and so on.

3. What type of investments should I invest in?

Before you decide what you should invest in, read up on the fund’s prospectus, past performance, disclosure statement, expense ratio, and any other relevant information that affects your money. Many a time, investors may take stock of what the investment might yield in a certain period of time, but they overlook the investment costs eating into the returns. Similarly, some investors don’t pay heed to the historical performance of a stock, which can help predict its future performance. Therefore, you must know exactly how the investment is going to make you money, whether it is through dividends or capital gains. You should also know how much it will cost to purchase, sell, or maintain your investment, how successful the company or fund is, the investment horizon, and whether or not it will get you the desired results in the context of your risk appetite and goals.

4. Is the investment opportunity legitimate?

Thousands of people fall victim to investment scams year after year, and the internet has only accelerated this problem. So, before you invest in anything, make sure to check the background of anyone who brings you the opportunity. Research well and look at the broker, investment advisor, product history, and whether they are registered with the U.S. Securities and Exchange Commission (SEC) or any other government agency. Generally, if an opportunity seems too good to be true, offers “guarantees”, feels overly complicated, asks you to invest immediately, or is based on an unproven business model, there’s a good chance it might be a scam.

5. What are the risks associated with this investment?

Investing is more about achieving your financial goals than averting risk. However, that doesn’t mean the risk factor is not significant. According to experts, how much risk you take on a particular investment will need to depend on what your goal and time horizon is. For instance, if you’re saving for a house and hope to purchase it within three years, your investment needs to earn a certain percent return per year. Based on this percentage, you can decide whether to take risks or be conservative. Another component here is how the risk compares to potential rewards. The greater the return, the greater the risk — this is true for almost every investment instrument. There are opportunities for every risk level, from CDs to hybrid mutual funds and even lottery tickets. This means not only can you steer clear of investments that don’t match your tolerance but also develop a diversified portfolio with a healthy mix of stocks and bonds.

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6. What are the costs associated with this investment?

Costs like expense ratio, custodian fees, commissions, loads, and advisory fees are a big part of investing, and becoming a successful investor involves minimizing these costs in order to maximize your returns. Many investors tend to ignore these details as they can seem too confusing or complex, but not knowing doesn’t stop the expense from existing and eating into gains. Though it’s true that no transaction is without a fee, you should do your homework and find funds with an expense ratio between 0.5 and 1%, as any ratio above 1.5% might be considered too high. At the same time, check the fine print to make sure there are no hidden costs and everything is above board. You should be aware of your real net return after all the expenses have been paid.

7. Is the investment performing as expected?

This should be a recurring question you ask about each of your investments every few months. It does not make sense to hold on to funds that are turning a loss or, on the contrary, not sell when the time is right. If you habitually take stock of your portfolio, you will be able to evaluate them without bias, sell off the ones that aren’t working, and focus more on the investments that are generating healthy, stable returns. According to research on stock performance, investors who check their portfolio once a quarter instead of every day reduce the odds of seeing a loss on investment by around 13%. Keeping an eye on investments from time to time (but not too frequently) helps alleviate stress and makes you less prone to reallocation.

8. Are my investments diversified enough?

The biggest difference between an amateur and a seasoned investor is the latter knows not to put all eggs in one basket. Portfolio diversification is a strategy designed to decrease the impact of market volatility on a particular investment you have made. You don’t want to concentrate your money on a single investment but instead, choose a range of assets and sectors to distribute the risk. But while diversification is the key to smart investing, there are instances of over-diversification that need to be avoided. This implies investing in so many types of instruments that your returns see a downturn, but the risk remains the same. Over-diversifying can also make it incredibly tough to manage investments and keep track of the market within so many asset classes. Therefore, the best way to diversify your portfolio is to spread the money across sectors and asset classes. A healthy balance of stocks, bonds, and mutual funds combined with other types of investments like real estate or gold is generally recommended by experts and advisors.

9. When should I consult a financial advisor?

Not every investor has the time, inclination, or energy to learn the nuances of finance. Some of them want to find easy, stress-free avenues that will help their money grow, while others may not even start investing till they absolutely need to. This is precisely when you might want to involve a professional advisor. Their job is to understand your financial situation as well as goals before coming up with the right strategies and helping you grow your wealth without having to worry about the effort. If you are unsure about what to do with your income, how to accomplish your financial objectives, or how to build your retirement corpus, it can be worth it to consult a financial advisor. Specific life events might also trigger the need to hire a professional, such as being close to retirement, inheriting a substantial sum of money, getting married or divorced, and starting a family.

To summarize

Asking the right questions about investing is the first step to creating wealth wisely. It helps you avoid basic mistakes and know where your hard-earned cash is going. Writing down detailed answers to every question will keep you on track in moments of crisis or confusion. Further, you can always contact a professional financial advisor to get a clear picture of what you need to do as an investor. Use WiserAdvisor’s free advisor match service to find 1-3 highly qualified and vetted financial advisors that are suited to meet your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.