When you invest money in the stock market, you always ask yourself, “Am I investing the right way?”
Every investor who has been in your position has asked the same question to himself. But how can you ascertain that your investments will pay off in the long run and you will be able to generate profits that will help you lead the life you wished to lead.
The following are the three key questions that you should ask yourself to understand if you are investing the right way:
- “How much am I paying as Fees?”
Generally there are three types of fees that you are charged, namely, advisory fees, transaction fees and product fees. While advisory fees are charged once in a year, solely depending on your account balance, transaction fees are charged as commissions for buying and selling investments. Mutual Funds and ETFs include multiple layers of fees to cover the managing of these funds. These product fees are very tricky to calculate and even though these fees are to be disclosed by law but there are so many additional complexities that sifting through these become a daunting task for an investor. Almost 0.25% of your investments get charged as product fees.
- “Am I Holding Too much Cash?”
If you are holding cash as emergency fund for some rainy day, then it is justified. But if you are holding extra cash that is beyond an appropriate emergency fund, then you miss out on the essential long-term returns you could possibly earn on that cash. This extra cash belongs to a long term investment portfolio, instead of holding it in dormant bank accounts. Neither can you gain anything by using this cash in short-term investments because your profits might be too little.
- “Is my Portfolio Diversified?”
Diversification is the key when it comes to spreading the risk over a well-balanced portfolio. Most investors know that if they can diversify their portfolios across different asset classes like bonds, real estate, securities, equities etc., they can optimize their portfolios for risk-adjusted returns in the long term. But sometimes it so happens that large positions in individual stocks become risky even if those stocks have shown promise in the recent past. Investors sometimes develop a bias to hold inappropriately large percentage of stocks in their preferred sectors in spite of knowing the importance of diversification. This is a mistake that investors keep on making consistently.
If you are paying too much as fund management or brokerage fees, you will be able to feel it yourself. If that is the case you need to change your financial advisor or shift to a new broker who will offer competitive rates. Holding too much cash in hand does not make you beat inflation. Investing the cash for the long-term equity does. So keep that in mind the next time you keep extra cash in your savings account instead of investing it somewhere for the long-term. Similarly, if you do not have a truly diversified portfolio, then you are in a trouble. You need to take care of these things and only then will you be investing right.