Financial Blog

16 Questions to Ask Yourself Before Investing

By: Security Bank Team | August 16, 2022

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Investing can be intimidating, especially if you’re just starting. After all, there are a lot of things you need to keep in mind before putting your money to work and that’s into even considering how fast changes can happen in the financial market nowadays.

Starting means you’ll eventually run into a lot of questions. Questions that, at some times, make you realize that you should have dwelled on beforehand. It’s essential to get answers and equip yourself with as much useful knowledge as you can before you begin investing.

Don’t let investing intimidate you. If you’re new to investing here are some questions you might want to know first.

What are the different kinds of Investments?

Before you invest it’s important to know the different kinds of investments available to you. Generally speaking, investments are bucketed into three major categories: stocks, bonds, and cash equivalents with many types of investments underneath. Be careful to choose which kind fits best according to your goals.

Where should I invest?

This boils down to what you want to happen at the end of the road, taking into account where you are right now. As mentioned before there are many types of investments available to the aspiring investor, but not all are accessible to everyone. Take for example stocks. Let’s say that a company’s stocks cost around PhP5.00 each. This seems reasonable right? But what you might not know is that some companies have a minimum number of stocks purchased required which may number in the hundreds. Suddenly that Php 5.00 you were eyeing turns into hundreds or even thousands of pesos.

Luckily there are types of investments that are relatively easier than others to get into like UITFs, Mutual funds, and more which allow you to put your investments in a pooled fund that will be managed by seasoned experts. Perfect for those just starting or who prefer to be less hands-on with their investments.

Do I Have an Emergency Fund ready?

Investing, especially investing for beginners, always has its risks. Before you invest you always need to consider the possibility that what you’ll end up with might not be what you envisioned when you started. So don’t use up all your cash for investing and leave a significant amount for yourself in case of emergencies. This is what the emergency fund is for.

Why is diversification important?

Diversification means not putting all your eggs in one basket. In finance, this means spreading your risk among different kinds of investments across various industries. Think of it this way, you can have many stocks in different companies, but if they are all based on the same industry and that industry slumps, every single one of those companies will follow.

What’s Compound Interest and how does it work?

Compound interest is the interest you earn on the money you’ve saved or invested plus the interest you’ve earned on your interest. Simply put, compound interest is when your interest makes interest. To learn more about how this works, we’ve written an article dedicated to knowing everything you need to know about compound interest.

Is there a perfect time to invest?

“Early and often is the best time of year,” says Andrew Crowell, vice chairman of wealth management at D.A. Davidson & Co. Waiting for an opportune time to invest is like timing the market, which never works well in the long run. That said, “research shows that there is some seasonality” to stock market returns. For instance, summer and early fall are often volatile, which can “be an excellent time to invest by taking advantage of lower prices,”. Following Warren Buffett’s rule to be “fearful when others are greedy and greedy when others are fearful,” new investors could benefit from buying during summer or when prices are often volatile.

What percent of my savings should be invested?

How much should you invest? Everything except your emergency fund of three to six months’ living expenses. Aim for 10- 15% of your income if you’re still in your 20s, 20% if you’re in your 30s, and 30% if you’re in your 40s. Start small and gradually challenge yourself to invest more as you gain more knowledge and confidence. Just make sure you’re not investing the same amount as what you think you’ll need in the next 5 years.

How much risk am I willing to take?

“Investing shouldn’t be in the context of risk,” says Ric Edelman, founder and executive chairman of Edelman Financial Services. Instead, it should be about achieving goals. Take it this way, when buying a car, your first thought shouldn’t be “how fast can I drive in this” but rather, “what am I buying this for?”. Remember that your investment goal ad timeframe is dependent on the risk you’re willing to take. If your investments need to earn a certain percentage per year to reach your goal, you need to be aggressively invested in the right instrument.

What are the best investments for first-time investors?

Mutual funds, Unit Investment Trust Funds, and exchange-traded funds (which pool the money of many investors to purchase various securities) are a good start for first-time investors. Ideally, first-timers should also Invest in a mix of stocks and bonds. You want a good mix of asset allocation (mix of stocks, bonds, and cash) and diversification (investing in different types of stocks and bonds). For instance, you may have 80% of your portfolio in stocks, half of that in large companies and half in small companies. Always do your research on performance and fees from a trusted website or financial advisor before investing.

What are active and passive funds?

Active funds have a manager trying to beat a benchmark, like the S&P 500, by actively selecting investments. Passive funds like index funds try to track their benchmark by holding the same assets. They follow the efficient market hypothesis, which believes it’s touch to outperform the market consistently. Instead, passive funds aim to provide a low-cost way of participating in market returns. Active funds often outperform in certain market conditions, such as market rallies and specific sectors, but investors pay more for these funds through higher expense ratios.

What’s an expense ratio, and where does that money go?

An expense ratio is an annual fee charged to shareholders to cover fund costs, expressed as the percentage of fund assets that go toward costs instead of being invested. The majority of this fee goes to management fees. This is why an active fund with a manager who spends a lot of time selecting investments has a higher expense ratio than a passive fund. Other expenses include administrative costs, taxes, and accounting fees. It does not include trading costs incurred by the fund.

Cost of the fund, or past performance? Which is more important?

While past performance is important, costs are even more so. Investors often “overlook how much investment costs can add up over time,” Here’s an example to illustrate this If at age 45 you invest P1 million in a fund costing 2 percent per year, by 85, you’ll have P4.8 million at a 6 percent return. If your total cost was only 1 percent, by 85, you’d have about P7 million – P2.2 million more. Costs are one of the few things investors have control over. Past performance is no guarantee of future results, but you can be sure you’ll pay your share of fund expenses.

What fund fees should I be aware of?

Other investment costs include turnover, or how much buying and selling a fund manager does. Since every trade has a transaction cost, funds with high turnover ratios can be costly to investors. Avoid funds with over 30 percent turnover, “and the less the better.”

What’s downside capture, and why should I care?

Downside capture measures a fund’s performance in down markets. It calculates how much the fund declines when the stock market goes down. For example, a downside capture of 90 indicates the fund generally experiences only 90 percent of declines. Lower is better: Funds that exhibit a low downside capture go typically down less than their benchmark during down markets. Research shows that funds with low costs, high manager ownership, and low downside capture tend to outperform their benchmarks over more extended periods.

What is the “Annual Percentage Yield” and why is it important?

The annual percentage yield (APY) is for investments while the annual percentage rate is for loans. It represents the effective annual rate of return, taking into account the effect of compounding interest. A standard rate of return, which is how much an investment grows over a given period represented as a percentage, makes comparison difficult when investments compound at different rates, such as monthly versus annually. The shorter a compounding period, the faster the investment grows. APY gives the rate of return, which is assuming annual compounding and that the funds will remain invested for a full 365 days. They are turning all investments into apples for a fair comparison.

What are emerging markets? Are they worth investing in?

Ever thought of dipping your toes into some Foreign Investments? Try looking at emerging markets. Emerging markets are countries that have ‘emerging’ economies. There are no definitive criteria for size or growth rates, but the most prominent emerging economies are Brazil, Russia, India, and China, collectively called the BRIC. Emerging markets typically have a financial infrastructure including a national currency, banks, and a stock exchange but low to middle per capita income.

Because they’re still developing, EM investments can grow faster than investments in developed nations. One risk that needs to be considered tough when investing in emerging markets is that political and currency instability can make investments volatile. So, while international exposure is an important part of a diversified portfolio, EM exposure should be taken with a grain of risk tolerance.

Depending on your investing, financial and personal goals, not all of these may be applicable but generally, these should cover the very basics of what most people tend to know before starting.

If you don’t know where to start, we recommend you learn the basics and fundamentals of investing first. You can start by browsing our investing blogs here.