Things to Consider Before You Make Investing Decisions

By Jennifer Noble | Sep 21, 2017

The world of investing is complex, and there are many things to consider before diving in. Most experts would likely agree that learning about investing is a lifelong process. There are some easily understood basics to be considered before making any type of investment decision, though, and we will examine some of the most common ones here.


Risk Tolerance


Risk is certainly one of the most important concerns when investing. Every investment is subject to some type of risk. Stocks, for example, can decline in value. Issuers of bonds can default. Interest rates can go down, and sometimes geopolitical events can affect the performance of entire markets. It is vital to understand what type of risk the investment you are considering is subject to. A good starting point is to ask yourself if you can afford to lose the money you are investing. The more money you are comfortable potentially losing, the higher your risk tolerance will likely be.


Investment Objective


Investments provide certain benefits, and it is wise to consider what you intend to gain from an investment before purchasing it. Capital appreciation is a common objective, and growth stocks are a common holding for these types of investors. Growth stocks are stocks issued by companies who plow their earnings into expanding their businesses, rather than paying earnings out in the form of dividends. Income is another common objective, and income-focused investors are typically attracted to the fixed interest payments offered by bonds, as well as dividend-paying stocks.


Investors who wish to hedge against inflation or profit during times of economic uncertainty tend to flock to precious metals such as gold and silver. Investor Andreas Christian said about precious metals investing: “Over the long term, precious metals have always retained their value. It is unlikely that their status as a safe haven for investors will end any time soon.”


Tax Situation


Another important consideration is the tax treatment of your investments. Holding your investments in a traditional IRA allows you to make purchase payments with pre-tax dollars, and not pay taxes on your earnings until they are withdrawn. Be aware, though, that withdrawals from IRAs before you reach age 59 ½ will be subject to a 10% IRS penalty in addition to ordinary income tax. Most other types of plans are non-qualified, meaning purchases are made with money that has already been taxed, and gains and losses are taxed in the year they are realized. When investing in a non-qualified plan, it’s important to be mindful of dividends and interest, which can be taxed even if you are not taking withdrawals from your portfolio. If you are in a high tax bracket, you may want to consider municipal bonds, income from which is free from federal income tax.


Time Horizon/Liquidity


Within what time horizon do you hope to realize returns? Investment performance can be unpredictable, so it’s important to keep in mind that there may be some time spent waiting before cashing out with a big gain. The likelihood that you’ll need to access the money you have invested will likely weigh on your investment decisions. For example, if you plan to invest an amount that you may need to spend within the next year, a short-term bond fund would probably be more appropriate than a small-cap stock fund, which would likely be significantly more volatile. On the other hand, an aggressive stock fund may be suitable for a young person investing for retirement, since they will have decades to recover from short-term losses.


Mutual fund investments are subject to sales charges. The structure of these charges varies depending on the class of the shares. These different structures are designed to benefit investors with varying investment time horizons, so it’s important to ensure that the shares being considered will result in the lowest amount of sales charge you will have to pay.


Conclusion


This is by no means a comprehensive reference of everything to consider before making an investment decision, but by understanding some of the most commonly considered factors, you will be a better-informed investor.


 

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