Financial WELLNESS: 5 questions to ask your investment advisor before investing

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Financial wellness with Richmond Kwame Frimpong: Retirement Planning for All – (Part: II)
Richmond Kwame Frimpong

When it comes to investing, it does not matter if you are a beginner or have been investing for many years, it is never too early or too late to ask these 5 questions before investing. We see too many investors who could have avoided losses if they had asked questions from the start.

In Ghana, many feel intimidated to ask questions about their investments (sometimes due to the way they are received by their investment advisors or professionals), but remember it is your money at stake, your hard-earned money.

And you are going to pay for the assistance of the investment advisor in the form of fees, so you do not lose anything to ensure these questions are answered before you invest.

The questions below if answered will thus help you invest wisely.

  1. What Is My Investment Objective?

An investment objective is the purpose for which an individual invests. Investments decisions must be made with a clear goal or objective in mind: regular income, liquidity, capital preservation, or growth. The first thing you need to decide is which of those characteristics is most important. In other words, are you looking for safety, income or growth from the investment? Do you need current income to live on in your retirement years, growth so the investments can provide income later, or is safety (preserving your principal value) your top priority?

For example, if you are 50 years or older before you invest, you really should define your objective (for instance a retirement income plan). This type of objective, for instance, will help you project your future sources of income and expenses, and your financial account values including any deposits and withdrawals. It helps you identify the point in time where you will even need to use your money and once you have a clear time-frame you know whether to use short, mid, or long-term investments.

  1. What Is My Investment Risk Profile?

It is a common saying in investments, that “the higher the risk, the higher the returns, and the lower the risk, the lower the returns”. Some investments entail what we call a level five investment risk; the risk that can result in absolute loss of almost all your money. These investments are too risky for most people (particularly the risk averse). One easy way to reduce investment risk is to diversify.

By doing so you may still experience swings in investment value, however, you can reduce the risk of a complete loss due to bad timing or other unfortunate circumstances. To build a solid investment plan, you may have to be cautious of buying only for high yield investments.

There is no such thing as high returns with low risk. Better to earn moderate returns than swing for the fences. If you decide to swing, remember, it can backfire and you can experience big losses. Kindly Refer to our publication on risk profiling to know your risk appetite.

  1. What Is My Investment Duration?

How long one plans to invest their money can alter their investment plans, and pivot the level of risk an investor can take. Same is true of how easy to get your money back if your need it urgently.

Just having a longer time horizon does not guarantee a higher return but it does mean you have time on your side to consider other investment options and strategies that might give you an advantage in the long run. Establishing a time frame(duration) you can stick with is of great importance. If you for instance need the money to buy a car in a year or two, you will choose a different investment product compared to if you are doing the same to buy a property in 10 years.

In the first case, your primary concern is safety – not losing money before the future purchase. In the second case, you are investing in a long-term goal, and anticipating significant growth in returns. What you care about is what choices are most likely to help your account be worth the most by the time you are ready to make your withdrawal.

  1. How Well Do I Understand the Investment Instrument?

Never invest in something you do not understand. Before you invest, ensure you understand the investment well enough to explain it to someone else. How will the investment make money? (Dividends, Interest? Capital gains?), What specific risks are associated with the product, what type of securities does the product invests in etc. Too many people buy the first investment product presented to them (by friends, family or bank sales reps).

With a good understanding of the investment product, you are able to lay out a thorough list of all the choices that meet your stated goal and it gives you a better appreciation of the pros and cons of that particular investment. Next, narrow your final investment choices down to a few that you feel confident about.

Some investments are great for long-term retirement money. Others are more speculative, which means maybe you can put some “play money” or “take a chance” money into them, but not all of your retirement savings.

  1. Which Investment House Should I Invest?

Where you invest your money is as important as why you are investing the money. Before you invest, it is imperative to take time to investigate who would be managing that investment and how safe your money can be with them.

One of the smart ways of knowing who watches over your money and their credibility is to take a look at the governance structures, how well they are regulated, as well as their track record (have they been successful in the past?).

Investigate if the investment product is licensed and regulated. Get to know the board of directors, get to know the management team, get to know how the company is doing compared to their competitors and it will guide you in your investment decision.

Conclusion

When you ask these questions, write down the answers you received and what you decided to do. Share those conclusions with your investment advisor (if possible, via mail) to be sure you are on the same page with them.

So that just in case something goes wrong in the future, your notes/email would help establish what was agreed and what has been breached. At the point of asking these questions, let your investment professional know you are taking notes of whatever is being said and they will know you are a serious investor.

You may send comments, questions or suggestions if any to [email protected] and @richmondkwamefrimpong across all social media platforms

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