Every time you invest your money, you’re exposing yourself to risk.
We can’t predict the future, and an investment that looks like a sure thing today may turn out very differently 10 years from now. Under normal circumstances, stocks, bonds, real estate, commodities, and other typical investment vehicles go up and down in value, and there’s no law or agency that will protect you from the normal fluctuation of markets.
Even if you put your money in an FDIC-insured, interest-bearing bank account, you’re taking the chance that it would have earned a lot more invested elsewhere.
But all risks are not equal, and you can — and should — limit your investment risk to what’s comfortable for you. If you’ve got to have a sure thing, go to the FDIC bank. If you’re willing to take on some element of uncertainty in pursuit of larger returns, here are four tips to help you avoid taking on more risk than you can handle.
- Know your broker.
- Research before you buy.
- Make sure the investment meets your needs.
Know Your Broker
Never invest your money with someone who isn’t a licensed and registered investment professional. If an unlicensed firm or individual goes out of business, there may be no way to recover your money.
FINRA, the private-sector regulating agency for the securities industry, can give you information on brokerage firms and individual securities representatives through FINRA BrokerCheck, including professional background, registration, complaints, legal actions, and investigations. BrokerCheck is available online or by telephone (800-289-9999).
Research Before You Buy
If your broker or dealer is legitimate, the next step is to check out the investment itself. Securities should be registered with the SEC and in your own state. Find a link to your state securities division on the North American Securities Administrators Association (NASAA) Web site. (Be aware that registration does not necessarily mean that your state or the SEC approves or endorses the investment, just that the legal paperwork has been filed.)
You’ll want more background before you commit your cash. Some important questions to ask:
- What are the fees involved in buying this investment? What will I be charged to maintain it, and what will it cost me to sell?
- What form will my return take — will I be paid interest on the investment, earn a dividend, or have to sell the investment and realize a capital gain?
- How easy would it be to sell this investment if I need my money?
- What external factors will affect this investment — the stock market, housing prices, interest rates, etc.?
- How long has the company been in business? Is it making money now?
- Can I get more information on this investment in writing?
Answers to some of these questions may be available in the company’s filings with the SEC, such as 10-K (annual) and 10-Q (quarterly) financial reports. You can find those on the SEC’s Electronic Data Gathering, Analysis, and Retrieval system, known as EDGAR.
Make Sure the Investment Meets Your Needs
There is no universal perfect investment. Don’t let sales pressure distract you from your investment goals. Ask:
- When will this investment pay off?
- Is this investment appropriate for someone like me?
- Are there better vehicles for meeting my goals?
- Are there safer investments that will offer the same return?
Most important, balance your choice of investments. It’s never smart to put all your eggs in one basket. Spread your risk among different industries, companies, and kinds of investments.
Sometimes, risky investments do deliver good returns. If you’ve done your homework and you’re determined to put your money where others fear to tread, remember this one last piece of advice: Never invest more in any one deal, especially a risky one, than you can afford to lose.