Questions to ask yourself before investing (and the answers!)

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Wanting to secure your back is a good idea, but where to start? Here are the top essential questions you should ask yourself to get started and refine your investment strategy.

1. How much can you invest?

Start by paying off your debts: don’t invest if you still have a lot of it. The returns on your investments are unknown. If it’s lower than interest, it’s best to pay off your debts first.

Then build up your precautionary savings: it is prudent to have aside between three and six months of expenses in the event of an emergency (an amount that may vary depending on your income). Next step: calculate your cash inflows and outflows with precision to know your savings capacity. Try to invest even a small amount.

2. Have you diversified your investments?

You probably know the adage that you shouldn’t put all your eggs in one basket. Diversifying your investments means choosing different types of investments, if possible in several geographical areas.

This helps balance your portfolio: if one investment performs poorly, another can make up for the shortfall. It is wise to have a mix of assets, some of which is in the form of savings available (i.e. money that you can easily take out in the event of a hard hit).

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3. How much risk are you willing to take?

As an investor, you have to make a crucial trade-off: take more risk and maybe earn more. But this necessarily implies a higher potential for losses. Here is what a risk scale could look like (from lowest to highest): liquidity / savings / life insurance contract in euros; government bonds, corporate bonds, high yield corporate bonds, equities, emerging market equities.

4. What can you afford to lose?

This question also helps you answer the previous one. Part of the risk-taking process is figuring out what you can afford to lose. For example, how would you react if your $ 100 investment lost 20% of its value? What if it drops by 60%? Knowing what you are prepared to lose guides you in the types of investments to make.

5. Why and when do you want to invest?

It is about thinking both about the time horizon of your investments, but also about the reasons which motivate them. Do you want to save for a great vacation? This is a short-term investment: opt for increased security and easier access to your savings via a savings account. Your money should not be tied up in an investment that can fluctuate wildly and is difficult to sell. Want to save for your retirement? Time is on your side! A good piece of advice for most investors, if you’re looking for long term investment than investing in rental property is the best option.

You can afford to take more risk because you have more time to absorb potential losses in a crisis and hopefully make gains when markets are green again.

Did you brilliantly answer the first 5 essential questions to ask yourself before making any investment? Here are the following 5 to ask yourself to strengthen your strategy!

6. Are you calm?

The typical investor mistake is to sell in times of crisis and to buy in good times. This flies in the face of the adage that you should buy low and sell high. Indeed, not knowing when to enter and when to exit the market can cost you dearly. Often, as an investor, the best thing to do is to do nothing. It is always recommended that you let your stock market investments “work” for as long as possible, usually five years or more.

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7. Will you reinvest your dividends?

When buying a share, you can choose how you want to receive your future dividends: paying income (distribution) or using those sums to buy new shares of the company (capitalization).

If you choose to reinvest your dividends by buying more stocks, you trigger the start of a process Albert Einstein calls “the eighth wonder of the world”: the miraculous effect of compound interest.

To put it simply, compound interest is interest on interest that allows an investment to grow more quickly. By reinvesting dividends, you give your investment the potential to generate even more dividends in the future, and so on.

The history of Pernod-Ricard shares is a good example. First scenario: you (or your mother) invested 1,000 € in 1990. You have decided to pocket the dividends with each payment. Eighteen years later, your € 1,000 is worth € 17,547

Second scenario: you had decided to systematically reinvest dividends by buying other Pernod Ricard shares. Your starting € 1,000 is now worth € 38,209. The graph illustrates both methods.

This principle can also apply to funds. Most funds give you the option of buying distribution shares (receive dividends) or accumulation shares (reinvestment).

8. Have you taken inflation into account?

Inflation is the rising cost of living and can erode the value of your money and investments. For example, € 100 in 2007 would be equivalent to only € 80 today. This is explained by inflation, which has fluctuated between -0.3 and 2.3% since 2007 and which reduces the purchasing power of this money. The goal of investing is to make money grow at a rate that achieves its goals and easily exceeds the rate of inflation. Otherwise, you will lose money.

9. How much are your costs?

Make sure you know the cost of your investments. If you invest directly in stocks, the costs of buying and selling are obvious: these are the transaction costs. It is common, however, that you also have to pay an annual commission or a percentage on your assets. Even a fee of just 1% per year can have a big impact on your investment returns over the very long term.

Regarding funds, the management company will apply an annual management fee. The total costs on outstandings, which also include other costs, is the best indicator. In a life insurance contract, you will also have to pay other costs, so compare the offers carefully.

10. Can you save more?

If you are able to generate additional income (increased wages, bonuses, etc.), the easiest way to save more is to set aside the additional amount directly. If you never use that money, you won’t miss it

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Author Bio

Jonathan is Founder of SPV Mortgages. He can help you find and secure the best limited company mortgage options to push your property investment dreams forward. As specialist mortgage brokers with over 10 years of industry knowledge, he has helped experienced landlords and first-time investors across the country; saving you time and money in tracking down the best rates.

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