The right questions to ask before making any investment

Highlights

• With numerous benefits ranging from beating inflation to building your wealth, investing in the right assets and creating a solid portfolio can help you reach your financial goals.
• But before you start placing your money on the latest hot stock, you must take a step back and ask the right questions that can save you from expensive losses down the road.
• Outlining your investment goal and crafting a solid financial plan can help you determine the type of investment you should go for. 
• Measuring your risk tolerance, in other words, how much loss you are willing to take is an important part of investing that will condition your investment choice.
• Having a solid grasp of where you’re placing your money is crucial to your success. Read your investment’s prospectus and seek professional advice when in doubt.    
• One way of balancing risk and reward in your investment portfolio is to diversify your assets.  
• Need help with your investment journey? Qualified and boasting a wealth of experience, CC’s advisors can address clients’ unique needs by crafting an appropriate financial plan before making any investment. Get in touch with one of our advisors to access our full range of investment products.

From staying ahead of inflation and providing you with a regular income to helping you build your wealth and meeting your financial goals whatever these may be, there are several benefits to investing, not to mention that building a portfolio of quality assets is one way of getting you ahead financially.

If you’re new to investing, your inexperience may cost you if you risk your hard-earned euros on hunches, hot tips and information that may or may not be grounded in facts. Such a move will inevitably invite avoidable risk and could result in losses.

Understanding your investments, doing your due diligence and having a well thought out plan can help you earn rather than lose down the road. Here we have summed up some of the key questions you should ask before making any type of investment.

1. What is my investment goal?

Typically, the objective of most investors is to maximise profit with minimum risk. But you need to go beyond that and truly establish what you are investing for. Are you aiming to save money for retirement? Or perhaps you’d like to earn some capital to be used down the line as a deposit on your first property? Are you looking to save money for your children’s education? You goal should ultimately be about having a specific amount of money by a specific date so that you can make something important with your life.

But answering this question will also help you determine which type of investment will serve as the ideal driver to meet your financial objectives. A hot tip on a particular investment and the prospect of making a lot of money from it may seem tempting, but jumping the gun and sidetracking from your true goal may result in a risky portfolio. Your best bet to establish your goal is to draw a financial plan.

2. What is my risk tolerance?

Risk tolerance is a measure of how much loss an investor is willing to take within their portfolio and it is a significant component when it comes to investing. Determining this largely depends on a combination of factors like your investment goals and experience, how much time you have to invest and your financial resources amongst other things. By having a good understanding of these factors, you’ll be able to make informed decisions, while you’ll be able to recognise whether a specific investment matches your risk tolerance.

All investments involve some degree of risk but remember that with the potential for greater returns comes greater risk. Understanding the crucial trade-off between risk and reward can help you distinguish between right and wrong opportunities. For instance, if you’re thinking of buying a technology stock, you must consider whether it is worth doing so because it is outperforming the market or because you think it may have the potential to become the next big thing.

3. What is my investment time frame?

Before making any investment, you must consider how long you can invest for. The time frame you will set will largely depend on how soon you need to turn your investment into cash, as well as your primary goal for investing. Your time frame will also affect the type of risks you can take on.

Generally speaking, the longer your investment time frame, the more risk you can take since you have more time at your disposal to recover from any potential losses. In addition, long-term investing tends to offer a better chance of beating inflation and reaching financial targets like your pension goal. So, if you don’t need to see a return for your money any time soon, you may want to explore investing in things less liquid like property. In contrast, if you need to increase capital in the short-term and taking a loss could potentially be disastrous to your plan, consider investing in more liquid assets.

Also, bear in mind that some investments may incur charges or penalties if redeemed earlier, so make sure that you will not need the money before the prescribed redemption period.

4. Do I understand the investment?

Plunging blindly into the latest stock of the week is not the best long-term investment strategy you can follow. Conversely, it’s important to have a firm understanding of where you’re placing your money. Ideally read an investment’s prospectus closely and look for key details like the risk factors, while depending on the type of investment, examine things like recent insider buys or sells, potential short-term business challenges, company profitability and initiatives to remain competitive. Alternatively, seek advice from a professional if you are still unsure.

Having said that, if you are an experienced investor you might want to consider going down the speculation route. Speculation or speculative trading is when a financial transaction that has substantial risk of losing value is carried out, however, it also holds the expectation of significant gains. Mutual funds and hedge funds often engage in speculation in the foreign exchange markets, as well as bond and stock markets. However, remember that speculation is not an easy way to become rich. It requires effort and it takes time, so go down this route only if you are confident enough to invest with little to no help from a professional.

5. How easily can I sell my investment?

Having a good understanding of your investment is significant. But it’s as equally important to have an idea of when you are going to sell it. Also known as your exit strategy, one of the worst investment outcomes is being unable to sell a losing investment when you want to exit.

For instance, if you bought a stock with the intention of acquiring a percentage of revenue growth per year yet this dividend yield falls and no longer meets your expectations, then it might be time to sell the stock. On the other hand, you may want to sell your investment if for example, you want to get out of a bad investment decision. As times change, market conditions shift, while your objectives may also alter overtime.

6. Is my portfolio diversified?

One way of balancing risk and reward in your investment portfolio is by diversifying your assets. To achieve this, you must spread your investments so that your exposure to any one type of asset is limited. So, buying 5 different high-technology companies does not make for good diversification practice. Instead, opt for different asset classes like stocks, bonds, ETFs and commodities to name a few.

Having said that, if you already have a portfolio and you are considering to add an investment, you must bear in mind how this will fit into your overall plan and how together your investments can work to help you reach your goals. Could the next investment make your portfolio unbalanced? Will you have to make adjustments which may cost you money?

From time to time revisit your investments to make sure that you want to carry on owning these. There is a possibility that an investment you make may experience a drop in price to zero. By rebalancing your portfolio, you may be letting go of investments that no longer serve their purpose and, in this manner, you’ll be making room for new growth to take place.

7. Should I get help from a professional?

You may be tempted to try your own hand at investing, but this requires time needed to make the appropriate research or the right inclination, knowledge and experience. Investing and managing your investments on your own could be risky if you do not know what you are doing it could cost you money. Sound professional advice is invaluable and it can be just the right input you need to draw your investment plan and take charge of it. From pinpointing gaps in your financial plan to helping you identify your financial goals and determining how your investments may help you achieve these, an investment professional can help you unlock your investment potential.

Need some investment help? Get in touch with one of our financial advisors and here are some key benefits of getting help from our team.
Asking questions before making any investment may not result in risk-free investing but asking the right questions will minimise these and further boost your chances of realising a good opportunity. Yet, investment success is a lifelong process and the only way you’ll manage to stay in the right path long enough to succeed is when your investment strategy fits your interests, goals and resources.

One of Malta’s largest independent financial services group and a founding member of the Malta Stock Exchange, Calamatta Cuschieri pioneered the local financial services industry in 1972. Since then, the Group has constantly pushed forward, moving from strength to strength, gaining an excellent reputation along the way. Today, CC has established itself as a 360-degree financial planner for investments, pensions and life insurance.

Explore our full range of investment options or visit one of our local branches for a FREE financial health check which includes a review and consultation session of your current financial situation with one of our qualified advisors and a customised financial plan tailored to your needs.