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Are You Ready to Invest?

Key Points
  • Whether you get started investing online or with a personal advisor, you need to answer some important questions.

  • At first, questions about your goals, willingness and ability to take risks, and how you make decisions may seem easy to answer, but dig a little deeper.

  • Investing should be based on a solid financial foundation. Before you get started, make sure you’ve taken care of some important basics.

Dear Readers,

With the recent market rise, I'm getting a lot of questions from mostly young people who want to get started in investing. Some are asking if using an online advice service—commonly known as a "robo advisor"— is a good way to get going quickly.

Now while I'm a big believer in the power of investing, and I love the fact that more people want to start building long-term wealth, I also need to add a caution that investing isn't something you jump into quickly to catch a market upswing. Quite the contrary, investing, as opposed to saving, requires a different, more focused mindset. Therefore, my advice is to start by asking yourself some important questions.

If you use a robo advisor, you'll most likely begin by answering an online questionnaire; if you go the "old-fashioned" route and meet with an advisor in person, you'll generally be asked similar questions. Either way, if you're serious about investing, you want to be ready with your answers. So before you get started, here are some things to think about.

What are your investing goals?

This is one of the first questions you'll be asked. Your immediate thought might be something as broad as “getting rich,” or “having a secure retirement.” But what if you have multiple goals like buying a house and college tuition for your kids? Would either of those take priority over retirement? Are you aiming at a short-term goal like a vacation or are you looking to build long-term wealth—or both?

The point is that most of us have many goals, so it's a good idea to list them all, thinking about which ones you'd put on top and why. This is important because the way you invest for a long-term goal can be very different from how you approach a short-term goal.

How much of a risk taker are you?

There's no getting around it, investing involves risk. Over time, stocks have historically far outperformed cash investments or bonds, but their trajectory has also been full of bumps and setbacks. How do you feel about that? If you decide to invest in the stock market, would you constantly worry about losing money? When the market declines, would you be able to maintain a long-term view?

Chances are you'll be asked a question something like: "If your investments suffered a decline of 20 percent or more would you sell everything, sit tight, or buy more shares?" It's probably something you've never really thought about but, as an investor, it's an important consideration. And your answer will affect your how you'd put together a portfolio of stocks, bonds, cash and possibly other assets.

How much can you afford to risk?

Being willing to take a risk is one thing, having the time and money to actually take a risk is another. Here's where you have to look at the big picture. The time you have to invest—called your time horizon—is a key factor. So think about how soon you'll need the money. For instance, if your goal is to retire in 30 years, you could invest more aggressively than someone who wants to retire in 10 years because you have more time to ride out market ups and downs. But if you need that money in the next three years (for example, for a down payment on a new home), you probably shouldn’t risk losing what you've already accumulated.

Likewise, if you only have a small amount of money to invest, you'll want to seriously consider how much you can afford to lose. You might be willing to take more risk—but is it wise in terms of the money you actually have to invest?  In other words, think carefully about how you would feel if you couldn’t take that big trip you had been counting on!

Are you a decision maker?

Another question is how much you want to be involved. If you’re a person who likes to maintain control, you're likely to be less willing to let an advisor—robo or otherwise—make all the decisions for you. However, if you're a novice with very little practical knowledge of investing, or someone who doesn’t have the time or interest to manage your portfolio on your own, it's likely a good idea to have some of the investing decisions made for you. There's no right or wrong way to do it, you just need to be aware of what suits you best as you answer the questions.

Answer your own questions first

In order to answer any of these types of questions with confidence, I believe you need to first have a pretty concrete handle on your financial situation. So start with a few of your own questions. For instance how secure is your current income? Do you stick to a budget and regularly contribute to savings? How much debt do you have relative to your income and can you keep up with your payments? Do you have a rainy-day fund and adequate insurance so that you can handle an emergency?   

These questions will give you a realistic handle on your finances and test your readiness to invest. If you need to make some changes, do it. Then, whether you use a robo advisor, talk to a financial advisor, or get help from a trusted relative or experienced friend, you'll be on your way to becoming a more knowledgeable, confident investor.  

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Important Disclosures

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The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. 

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