Deciding on which investment to choose from the dozens of options on offer within the 401(k) plan or the Roth IRA, when signing up for them, could be a daunting task as it is a major financial decision. Countless investment queries may arise and the investment guides do provide a lot of information regarding these queries. But mostly, these guides confuse more than explain with an information overdose.
So when choosing an investment, look out for the following five pieces of information which may help in making a good decision. Seek answers to these five questions and examine the investment based on the answers you find for them.
1. My Goal?
Bear in mind the goal you wish to achieve by putting money in any particular investment. Deciding on the goal is of foremost importance. If your goal is to invest in your retirement then you may have a few years at hand. Based on that you can select a long term investment which has less yield but will produce a desired amount over a period of time. If instead your plan is to invest for starting your own business within a four to five year span then you are more suited to choosing a high yielding investment which will provide greater returns sooner. Having a set goal gives you a time frame to work on to choose a better investment.
2. Volatility of the Investment?
This question is linked closely with the first one. It is vital to see how rapidly the investment varies. A general rule would be to accept less volatility in the investment when closer to achieving your goal so that in the worst case you don’t take a big drop down. To check for the volatility of the investment take the annual rate of return of the investment for the past ten years and take its average as a reference value. The greater time away you are from your goal the greater percentage of volatility can be acceptable. You may also opt for multiple investments based on the volatility and the time frame available.
3. Investment Fees?
This is next in the line of questions you should be asking. Investment companies make money by charging an annual fee from you which is usually a percentage of your investment amount. If the investment fee is 1% then the company keeps 1% of your investment for itself. So, the lower this rate the better. This figure helps to compare two investments with similar volatility. Index funds are such investments which have a low investment fee.
4. Long Term Investment History?
What you want to know from this question is what returns does the investment provide each year on an average. Once you have a bunch of investments with similar and suitable volatility look for the annual growth over the last ten years to make a decision.
5. Diversity of the Investment?
The investment you make should deal in multiple items rather than a single item. You want to invest in a diverse range of stocks and bonds and the likes. This prevents you from being hit hard if that single item or company is heavily dented thereby providing a balance to your investment.