I am in the process of helping multiple clients invest their portfolios. Some require heavy financial planning because their plans are very complicated with multiple different types of assets, varying timelines, and many different scenarios of what could happen. Many people do not need (or simply don't want) to put as much detail into their planning. I urge you to ask yourself the following simple questions before jumping head first into the market.
1. What is your plan for your investments?
This is the most basic question that many people fail to ask. Why are you investing? Is it for retirement? Or are you planning for a college education? You need to structure your portfolio in very different ways to accomplish different goals.
2. What are your expectations for the investments?
Make sure your expectations and your chosen investment vehicle are aligned. Don't buy bank CD (certificate of deposit) and expect it to do anything besides beat inflation (if even that!).
3. Do you have other assets outside of your investment accounts?
You have to look at your financial situation globally. Do you own a house or other real estate? What about a small business? Or a pension? There are many other investments that impact how you invest your retirement accounts.
4. What is your annual income and expenses?
Do you have the ability to recoup losses with a steady paycheck? Or is your job commission based and your income is more tied to the economy? This will have an impact on how you invest your portfolio.
5. Do you anticipate any large inheritances or other one-time cash flows?
This needs to be accounted for when building your portfolio so you aren't adjusting your portfolio allocation dramatically when it occurs.
6. Are you investing for yourself or the next generation?
This goes along with question 1. If you goal for investing is to pass along your wealth to the next generation then your portfolio will look very different from what it would be if you were investing for retirement.
7. Do you have at least 3 months of cash reserves?
If not, make sure you plan on building up your cash reserves while you are investing/saving for retirement. These cash reserves should be easily accessible in case of emergency. Taking money out of your retirement accounts can be done but is very costly in terms of penalties, taxes, and timing, i.e you could be pulling money out when the market is down.
8. Do you anticipate major lifestyle changes?
Changes in income, geography, and major purchases could all be reasons to change how you invest. Keep these things in mind when planning out your portfolio.
Think I missed some? What questions do you ask before investing?