Here is a check list of things an investor should check on before getting involved in an investment.
- Is the investment understandable?
If one didn’t know what a collateralized mortgage obligation (CMO) was, for example, investing in it would open the investor up for surprises. - What could go wrong?
Too often we ask how we’re going to make a lot of money. But often exploring what could go wrong will be more fruitful. - Does the investment compliment the existing portfolio?
If the investor already owns 10 pieces of rental property, or 10 internet stocks do they really need another one? What if that whole sector has problems? - How often does it need to be reviewed?
A bond or some real estate can probably be checked twice a year, but stocks need more attention. If the investor can’t give it that consistent attention, maybe going into a mutual fund, joining an investment club or hiring a money manager would make sense. - What does it cost to get in and out?
With real estate and penny stocks it may cost you 20% or more to get in and out of an investment, versus maybe only 1% for a listed stock or a bond. Those costs must be accounted for. - Why buy it?
The most fundamental question. The investor should always have a good reason for buying an investment, not just “I want to make a lot of money”. - Can the investor wait?
With risk investments sometimes it can take years to make a profit. Patience is often the single most important attribute for an investor.
If one answers those seven questions before diving into an investment, the chances of success (or at least of not being surprised) go up.