The question is how to invest money to make money. The answer is to invest money only after asking a few questions about investment basics. Here are the questions to ask, and how to invest money to avoid scams and bad deals in general.
How to invest money, rule #1, is that there is no such thing as a perfect investment. A perfect investment would have the following features: guaranteed safe, guaranteed to make money and lots of it, high liquidity, zero costs and expenses, big tax breaks, and easy to monitor… so you always know where you stand financially. All investments can be compared based on investment basics, but no honest proposition contains all of the above features.
A scam will generally IMPLY that safety and high profits are guaranteed. Your first question before you invest money: what are the specific guarantees for safety and investment returns? If the answer you get sounds confusing or misleading, you have no need to ask any more questions. Something is rotten in Denmark, since no investment offers high safety and high profits… except scams. Now, let’s move on to some other investment basics and questions to ask. Remember, a large part of knowing how to invest money involves knowing how to avoid bad investments or those that don’t fit your needs.
Ask about LIQUIDITY. How quickly and easily can you get your money back if you want to cash in? What will it cost you? This is a very honest question, and the answer you get should be straightforward. You’re out to invest money to make money; not to get stuck with a loser that will cost an arm and a leg to liquidate.
The COST OF INVESTING is another investment basic you need to ask about. Most investments involve charges and fees to buy, hold, and/or sell. Many times the details are in the fine print, so make sure to ask upfront. High investment costs can turn a winner into a loser. For example, a good simple fixed annuity will pay a competitive interest rate and will have no charge to invest or hold; and no charges to cash in after just a few years. The wrong annuity contract can cost you 3% or more a year in charges and fees, plus heavy charges if you cash out in the first few years.
Be real careful when an investment promises tax breaks. Ask questions first and get it in writing before you invest money. Then, run it by your tax professional if you have one. If you don’t, take a pass. Your goal is to invest money and make money in the process. Not to take a chance and wind up in trouble at tax time.
Our last area of concern in regard to how to invest money and investment basics I refer to as VISIBILITY, or the ability to monitor your investment. After you invest money, then what? Can you track the value of your investment so you know where you stand financially at all times? Will you receive statements each quarter and at the end of each year showing the value of your investment assets?
As a financial planner, some of the worst horror stories of new clients I interviewed were brought to light when I asked to see their records for the investments they held. Sometimes their records or statements were incomplete or otherwise questionable. Sometimes, these investors could find no records at all and didn’t know who to contact to find out the status of their investment. That’s a perfect example of how to invest… NOT.
Before you invest money, sort out the investment basics covered in this article to avoid scams and other major investment mistakes. Don’t be afraid to ask the questions presented here. If you are dealing with honest people, they will be glad to answer your questions. If not, look someplace else.
A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.