What You Should Ask Yourself Before Making an Investment

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Every time you earn more than you spend you make an investment.

That excess cash is put somewhere.  Whether that cash is put in the bank, put in a safe, put in stocks or bonds, real estate, insurance, a business or spent on education, it is invested somewhere.  There are risks and opportunity costs you are taking.

There are many Americans out there who love to do research.  But, they love to acquire research about a topic they are interested in.  Not too many Americans are interested in investments, finance and financial planning.  That may be why I have a job!

car-1149997There are many Americans out there who will spend hours and hours researching a new car.  Partly because they like cars or shiny new objects, but also because a car is tangible.  You can touch, feel and smell a car.  You can’t do any of that with an investment.  Unfortunately, there are many Americans who will spend much more time researching the purchase of a new car than they will spend on how to make an investment.

According to Google, the word gambling means: to take risky action in the hope of a desired result.

There are many among us who do little more than gamble with their hard earned savings.  The good news is that there are ways to invest to potentially increase the odds in your favor.  Here are a few questions to ask yourself or your investment advisor before making an investment.

  1. Does this particular investment fit into my financial plan? Is it either increasing my expected return or reducing the expected risk of the plan?

  2. Why am I making this particular investment?

  3. What are my expected range of outcomes (both the upside and downside)?

  4. What is the reason that makes me think this investment will offer a good return?

  5. What is the worst case I can think of and am I comfortable with that outcome for this size investment?

  6. Am I making this investment based on emotion?

If you can answer these 6 questions about the potential investment then you have done more due diligence than most of the investing public and you will begin to put the odds in your favor.

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