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How to pick the right investment: 5 questions to ask yourself

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Regardless of how spicy you like your investments, it's always important to find out if an investment is just right for you, before you forge ahead with it.

Few people buy so much as a teapot these days, without reading a breakdown of how well it pours, what you need to do to keep it clean, and all the rest besides! So whether you’re a Suspicious Saver finding your feet or an Intrepid Investor refining your process, take the time to find the investment option that's right for you.

Here's our intro to the 5 basics you should factor in:

  • Does the investment fit with my financial goals? Just like hopping in a sailboat and making for the horizon, it’s useful to know where you want to end up. Otherwise, it’s impossible to tell if you’ll need a packed lunch and life jacket or a harpoon and sonar. The same can be said with investing. Do you simply want to build a little nest egg bit by bit? Or are you looking to pay off your mortgage by the time you turn 40? Whatever your reason for investing, your time-frame and risk level needs to match. So don’t pick a spicy stock that’s up one year and down the next if you’ll need to withdraw your money at a moment’s notice.
  • Do I already have similar investments? Eggs and baskets spring to mind here. As you’ve probably heard, diversification is key to managing the risk of your overall investment portfolio. So if you’re interested in a new smartphone maker from China, but your portfolio already includes a load of other smartphone makers or a load of other Chinese stocks, tread with caution. If smartphones are suddenly replaced by the next big thing, or if Beijing is hit by a financial crisis, you’re stuffed.
  • How often will I need to make adjustments? If you’re investing in funds over shares, it’s safe to say you can take a more hands-off approach. Whether active or passive (active meaning an actual person manages the fund – passive meaning an algorithm follows trends in the stock market), a fund effectively spreads your bet so you can leave it to do it’s own thing. On the flip-side, if you’re excited by the prospect of playing the market and attempting to buy and sell at the most profitable times, you’ll get your kicks from shares. But the risks are much higher.
  • Do I understand all the fees? To buy a share, fund or other type of investment isn’t the same as to buy a bag of crisps from the supermarket. They both have a set, upfront cost on the surface, but investments also come with extra fees and charges that build up over time. You might need to pay management fees to the people who invest on your behalf, platform fees for access to the website or company you use, plus admin charges, exit fees, trading costs, performance fees and all sorts. They soon add up and cut into your profits, so make sure you ask for a clear picture of everything you’re signing up to before you commit.
  • Should I get financial advice first? If you’ve struggled with any of the questions above then the answer is probably ‘yes’. Even if you haven’t, with an independent financial adviser on your side you’ll be able to decide with confidence whether to take the plunge or sit this one out. You’ll have to pay (yet another) fee for financial advice, but it’s generally worthwhile. Not only will you have a professional guide to assess your circumstances and make positive recommendations, you’ll have someone to protect you from mis-sold products. Some financial advisers will give you advice for an hourly rate – have a look at VouchedFor for advisers in your area. Hourly fees are around £150 - £200.

Still unsure whether to invest or not?

Then play it safe for now. It’s better to hold out for a while and, at worst, miss out on some interest, than to go in all guns blazing and lose the lot.

For further reading on the topic, check out our learning path for Making Your First Investment.

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