Whether you are sponsoring your daughter’s softball team or buying Apple stock, all investments have their benefits and possible downfalls. Here are four factors to consider before investing in anything.
Your investment is not likely to stay at the exact value you purchase it for. Using historical data or other data you have available to you, you need to understand what the price has done or is likely to do. You also need to consider the chance that the investment goes belly-up and you lose everything. Typical to any investment, a higher amount of risk should provide you with a higher reward should the investment work out.
Look at that, a nice segue into our next category (funny story. When I was young, I thought when people said “segue” they were always referring to the Segway transport vehicle. For you young folks, here is what I am referring to. You can understand my confusion trying to figure out what the heck people were talking about). You should always attempt to estimate what return you can expect and whether the risk is worth undertaking for the expected return. How do you calculate return? As with any other exercise of trying to guess what the future holds, you simply make a best esimate based on what similar investments have done and use other assumptions.
Everything has a price but the cost of an investment can erode your returns. In terms of investing in securities, everyone knows advisors have a standard planning fee but there can also be start-up fees and fees for developing a financial plan. When investing in mutual funds, there is an expense ratio and they can also have front-end load(price you pay when buying into the fund) and back-end load (price you pay when selling out of the fund) fees. Do your research on whatever it is you are investing in to be you sure you understand all included costs.
Imagine running in a race and getting to the finish line only to realize you incurred penalties along the way that were added to your time. That is the way I feel about investing without thinking about the future taxes you will incur.
Retirement accounts have inherent tax advantages but you still pay taxes either when you put money in or take it out. Income generated in other funds can be taxed at your income rate and then of course there are capital gains taxes whenever you sell an asset. In my opinion, this is one that people tend to neglect the most. Lots of folks do a great job of investing through the years only to have the Tax Man take a large portion of their hard earned wealth because they failed to prepare for the inevitable tax bill. Be different. Begin with the end in mind.