5 Questions You Need to Ask Before Investing

As an investment advisor, I hear how’s the market doing? all the time and I always try to answer politely. Believe it or not, I never watch CNBC and unless I’m trading that day, and I don’t monitor intraday volume and pricing. I’m too busy doing my job, which has nothing to do with the media machine that surrounds the stock market.

If you asked me how many of my clients are on track to achieve their financial goals, I could tell you an exact number at any moment. I could tell you, specifically, why some are having greater success than others, and what specific action steps are necessary for those who are not on track. None of those steps have anything to do with current market conditions. (For related reading, see: The Power of Momentum in the Face of Volatility.)

If you're an investor considering current market conditions, here are five questions you should ask an investment adviser before you make any decisions.

  1. How much is enough? Market return does not matter if you do not know where you are going. You should ask what lump sum amount of money is necessary to achieve your goals.
  2. What’s my required return? Once you know how much you need, you should ask what return on your money is necessary to hit your goal. If your required return is 3% and you are investing aggressively in stocks and real estate, then you are taking too much risk. Conversely, if your required return is 7% and you are conservatively invested in bonds, then you are unlikely to achieve your goal regardless of market conditions.
  3. What is the expected return of my portfolio? Do not misunderstand; your expected return should not be a guess based upon somebody’s gut instincts that you read this morning or saw on Squawk Box. Professional investment advisors calculate expected return from detailed historical data and years of experience. We use your expected return in your Investment Policy Statement, and in your planning calculations. Expected return is a long-term educated guess and has little to do with current market conditions.
  4. What is my personal rate of return? Over time, you will accumulate a track record on your personal investment performance and you probably have no idea what it is. I consider this to be an epic fail for the financial services industry. I fervently believe in tracking a client’s past performance against expected return, but that puts me in the minority. There is a lot we can learn if we track actual personal performance, so you need to know this.
  5. Why is my personal rate of return different from my expected return? First of all, you should understand that your personal rate of return will ALWAYS differ from your expected return, and sometimes significantly. Expect a variance, but always ask why. The answer is never easy and not always clear, but helps us better understand how market forces affect your portfolio. Over time, we would expect your outcomes to closely resemble your expectations ... but it takes time.

You can watch the stock market all day, every day, along with all of the entertaining insight provided at all hours, but it will not help you achieve your financial goals. In order to succeed, you must implement a process that incorporates these five critical questions. (For related reading, see: 6 Tax Planning Steps to Take Before the Year Ends.)