4 Important Questions Every Investor Should Ask
Joan R. Ginther has won the lottery four times.
First it was a measly $5.4 million. Then $2 million. Then $3 million and finally, in 2008, the Texas native hit a $10 million jackpot.
They say luck is what happens when hard work meets opportunity, but perhaps this was an exception. It seemed like Ginther was simply the most fortunate person alive. Then people started taking a closer look…
This lottery winner wasn’t just a simpleton who’d lucked into boatloads of cash. She earned a Ph. D. from Stanford University. And she had purchased approximately 80,000 lottery tickets in her lifetime.
Suddenly, it all added up. Ginther’s secret wasn’t luck. It was preparation.
Fortunately, for those of us who can’t stomach fronting thousands of dollars buying lotto tickets to see returns, the stock market presents a less risky, more time-tested method of making money. But even if you’ve bought stocks instead of a stake in the lottery, preparation is still a vital ingredient in enjoying hefty returns. In fact, if you can prepare by answering these four simple questions about yourself, then your odds of successfully investing increase exponentially…
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1) What are my ultimate goals? You don’t start a trip without a destination in mind. Are you saving for college? Retirement? A dream vacation? All three? If so, calculate how much you’ll need and don’t forget about inflation. Then you’ll have a realistic idea of how much to set aside and what returns you need to reach your goals.
2) What is my age? A retiree no longer drawing a salary and living off his or her nest egg can’t afford to take the same chances as a recent college graduate. The old rule of thumb for equity exposure is 100 minus your age. So a 40-year old investor might keep 60% of his portfolio in stocks, versus just 30% for a 70 year-old. This is a simple, but not unreasonable guideline for many people. The point is to build wealth during the early years and then protect it during the later years.
3) What is my risk tolerance? How would you react to a market decline of 10%, or 20% or 30%? Nobody likes volatile, stomach-churning price swings or the thought of losing hard-earned money. But you probably won’t reach your goals by playing it safe and leaving all your money in Treasury bonds paying 2%. Risk and reward go hand in hand. Just don’t lose sleep at night — try to find a comfortable balance.
4) Do I want international exposure? Are you more comfortable sticking with U.S. companies, or do you want to explore opportunities abroad? Remember: more than half of the world’s market capitalization now takes place outside our borders. International markets can offer higher yields and stronger growth potential (in some cases) and exposure to foreign currencies that may shelter a portion of your money from any devaluation of the dollar.
There is no “right” answer to these four questions, but your answers will allow you to develop a strategy and criteria for potential investments. Maybe you’re a 51-year-old with a low risk tolerance. Or perhaps you’re 22 and your goal is to build the foundation for a retirement that’s decades away.
Once you’ve identified your goals and time frame, it’s time to find some winners that fit your profile.
Even though preparing your investing strategy by answering those four questions is crucial, it’s useless without the ability to identify stocks and ETFs to perfectly fit your criteria and achieve your investing goals.
That’s where I can help.
I present investing ideas each month in my premium advisory service, High-Yield Investing. Regardless of your risk tolerance, goals or ideal time frame, I recommend investments that have outperformed the market while delivering robust, sustainable dividend payouts. If you’d like access to my entire portfolio of high-yielding stocks, follow this link.