5 smart investment checks

Investing can make your money work harder and help you to reach your financial goals. By checking these 5 things before you purchase an investment, you can increase your chances of success and help get the most out of your investment.

1. Will I need this money soon? 

Needing your money soon could mean that you're not ready to invest. Investments often fluctuate in value, and relying on short-term returns could leave you vulnerable to potential losses. Here are some things to consider to help you determine how soon you’ll need your money:

Emergency fund

Have you got an emergency fund in place to cover any unexpected expenses? A rule of thumb is to have at least 3 months of your living expenses put aside. This will act as a financial cushion, helping you to handle any sudden shocks without needing to cash out your investments early. 

Market fluctuations

Can you deal with your investments increasing or decreasing in value at any time? Consider whether you’re relying on your investments to generate returns for an immediate or near-future need. You’ll want to check whether this investment aligns with your goals and how soon you’ll want to access your returns.

2. Do I understand how this investment works?

It’s important to have a good understanding of how your investment will generate returns and choose the right investment for your goals.

Some investments will offer returns as capital appreciation, meaning your asset can increase in value over time. Other investments may pay your returns to you through regular payments, which are often referred to as dividend payments. 

Before investing, be clear on these things:

• Are there any platform fees, management fees or other costs? If so, make sure you are comfortable with these expenses, as they can chip away at your returns over time.
• How easy is it to sell or cash out from this investment? Some investments can be sold easily while others may be more difficult, time consuming or costly to sell. How easily you can cash out from your investment, can affect your ability to access the funds when needed.

3. Is this investment right for my risk tolerance?

How much risk are you able to take on? High-risk investments may offer higher returns, but they also come with the risk of significant losses.

Consider your current financial situation:

• How stable is your current income?
• Do you have major financial obligations, that may affect your ability to take on risk?
• Can you handle losses, without panicking, or do downturns cause you stress?

Your personal circumstances should guide your risk tolerance. If you rely on stable returns, you may prefer low risk, income-generating investments.

Learn more about high-risk investments

4. Does this investment diversify my portfolio?

Take a look at your current portfolio (all the investments that you currently hold). Are your investments concentrated in one sector or economy? If so, consider diversifying across different economies, asset classes (a group of similar investments) or industries. When one investment underperforms, others might perform better, stabilising your overall returns.

New to investing? Learn more about diversification.

5. Am I okay with losing some money?

If the investment goes south, are you able to weather the loss? Always have an emergency savings fund or alternative sources of income in place.

Determine how much you can afford to lose without affecting your overall finances. Investing always comes with some risk. Ask yourself whether you are okay with the risk of losing some of your money.

If you’re able to confidently tick off this checklist, then you’re likely on the right track and potentially ready to purchase your investment. However, if you have any doubts on any of these 5 questions, it might be worth pausing and doing more research before you invest.