What to ask before investing in ETFs, funds or anything else? You need to gather as much information as possible: to help you, I try to provide a small survival kit for novice investors, with four most important questions to ask when you want to invest.
A premise before starting: I wrote “invest in ETFs, funds or anything else” because the investments proposed by financial advisors and banks are many and you can get stunned. As well as “lightened” in the wallet, due to the commissions (always a little hidden …). Not to mention the poor choices of managers in terms of portfolio allocation, with the damage that can result.
The following 4 questions to ask before investing are mainly focused on ETFs and mutual funds, but are generally valid for almost any type of investment (excluding trading or cryptocurrencies for example).
Questions to ask before investing #1: what is the investment object / strategy and how risky is it?
You should immediately understand if the product is right for you. First of all, they must tell you if it invests in stocks or bonds, specifying which geographical area, or in currencies, commodities and so on. Or again, if it is an ETF or fund that dynamically invests in the various asset classes. Investments in stocks, commodities and currencies tend to be at high risk, while bond investments are medium to low risk investments. But it still depends from case to case.
Risk is the fundamental point, whoever proposes the investment must tell you how risky it is. Specifically, it must tell you how much you could lose if things go wrong. To answer the question they could come up with indicators with quite sophisticated names, such as VaR, volatility and so on, and start rattling off numbers: don’t be intimidated and insist on knowing how much you could lose, in other words.
Questions to ask before investing #2: how liquid is the investment?
It means “how often can I buy or sell it?“. I would say that there are only two admissible answers: “it is traded on the stock exchange” (case of ETFs), or “daily”. If they tell you “weekly” (ie you can only sell it on a given day of the week), be suspicious, because it is a strong indication that they use illiquid financial instruments, whose illiquidity can only have negative consequences for you.
This is a very important element, so much so that I have published the guide Investment liquidity: definition and advice.
Questions to ask before investing #3: how long has the company that manages the fund/ETF been in existence?
A long history and a well known brand, all things being equal, increase credibility. But if the management company is new it does not mean that you have to run away, because there are excellent ones, made up of experienced and reliable professionals. It just means that you need to deepen a little to understand if, in fact, it is a serious company or a band of scoundrels.
The same goes for a company that issues bonds or stocks that you would like to invest in.
Questions to ask before investing #4: how “active” is the product?
This question is used to understand if the cost they charge you is proportional to the work done by the management company that takes care of the product. Ask if he is little or very active, or if he is passive. High fees are justifiable only for very active funds, that is, in which the manager really makes important investment decisions and is not limited to replicating an index (or something like that).
Being active or passive managers, in itself, is neither bad nor good. For intellectual honesty it must be said that, on average, active managers are about 2% worse per year than passive products. However, some active managers do much better, but it is difficult to identify them and understand if it is about skill or luck.
ETFs are almost all passive funds, so for ETFs this is a superfluous question.
Buy only products or services that convince you
Anyone who offers you an investment must be able to answer these questions. Of course, this also applies to any online finance site.
Also, always be careful: even after answering they can give you some junk product. This is not the rule, of course, but it happens. So, when in doubt, use common sense: if you don’t understand an investment or if it stinks, forget it.