The financial services industry is enormous. The available investments seems endless. There are about 10,000 listed stocks in the US, plus about the same number of mutual funds. If you include the different fund classes, that fund number goes up by a factor of 3 or more. There are more than 1,000 ETFs, more than 600 closed end funds. And get this, more than one million different bond issues. That doesn’t include commodities or options or any annuity, insurance or bank products. And that’s just domestic. Shall we now talk about international investments?
It’s enough to make an investor’s head spin. How do you choose? One way of course is to hire an investment professional and let them do the choosing. But whether it’s you doing it, or a professional, there is a process of elimination that is required. It’s just like buying a car. There are 100’s of vehicles available, but probably only a handful that are appropriate for you. So the trick is to reduce the choices down to a manageable few. So here are some questions to ask, that will help you get the choices down to a reasonable number:
- On a 1 to 10 scale, what is your overall risk tolerance?
If it’s a 1, you’re buying insured bank products and government bonds and nothing else. If you’re a 10, you’ll be in commodities and bio-tech stocks. Most people are in the middle somewhere. - What is your time frame?
If you only have a few years, that leaves out many investments such as stocks, which are medium to long term investments. If your time frame is long, then stocks and other long term investments are where you’ll want to be. - Do you want yield, capital gains, or both?
Of course we all want 30% annual returns and a 10% dividend. But what is more important? Do you need immediate income? Do you need to build a large future nest egg? Or something in-between? - Are you comfortable selecting individual investments? If you are, you can have more control buying your own stocks or bonds. If you are not, then mutual funds, ETFs, or close-end funds are probably the way to go.
- Are taxes an issue? If your money is an IRA, then you don’t want municipal bonds, and you don’t care if you have short term capital gains. If it’s in a taxable account, and you’re in a high tax bracket, then you need to carefully consider the total return after taxes.
Answer those questions and you’ll have a much smaller (and less intimidating) universe of available investments to choose from.