Before purchasing an investment for your portfolio, make sure you can answer these questions about that investment:
Do you know the investment's basics? It's not enough to know that it's a stock or bond. You need to thoroughly understand the company behind the investment. For instance, if you are considering a stock investment, investigate the company's business, revenue sources, competitors, historical financial performance, future prospects, historical and current stock price, and a host of other variables.
Will the investment fit with your current asset allocation? Your asset allocation mix should provide guidance as to what percentage of stocks, bonds, and cash to hold in your portfolio, including different categories within those broad areas. Make sure any new investments won't throw your asset allocation mix off. If it will and you still want to purchase the investment, you may need to sell another investment to keep your asset allocation in line.
Why are you purchasing the investment? You should have clear reasons for purchasing the investment. You may even want to write those reasons down for future reference. Often, if the reasons why you purchase an investment are clear, it can help you determine when it's time to sell.
Is this the only investment of its kind? If you are selecting a stock because you like that industry, does that stock have the best prospects? Don't just research one specific company. Research all companies in that specific area to ensure you are selecting the appropriate investment for you.
Do you have time on your side? Consider your time horizon for investing before purchasing an investment. For instance, if you are purchasing a stock, you need to invest for the long term so you have time to overcome any short-term volatility.
Do you already own similar investments? Investors tend to purchase investments they are comfortable with, often adding similar investments to their portfolio. This does not add much in the way of diversification, while making the portfolio more difficult to monitor.
Are you comfortable with the investment? Even if you think an investment is a good one, you shouldn't own it unless you are completely comfortable with it. If you are nervous about the risk or don't understand it, don't purchase the investment. There are so many investment options available now that you should be able to find ones that you are comfortable owning for the long term.
Please call if you'd like help assessing an investment.