I received a phone call from a client I have known for 21 years. She had been solicited by a salesperson trying to sell her an investment. As I listened and asked questions, it became obvious she had not been given all the information she needed to make a sound decision.
Investor Pro Tip: Before making an investment, ask questions and get the facts.
If someone recommends an investment product, be sure you understand exactly what you are buying before you do anything. Nothing is perfect, and there are pluses and minuses to everything. Be sure to ask questions, get the facts, and if you do not feel comfortable, get a second opinion.
THE COST OF BUYING AND OWNING THE INVESTMENT
- Are comparable products with lower sales charges available? If so, there is no reason to pay more for the same product.
- Does the product have any “contingent deferred sales charges” (sometimes called CDSCs)? Suppose you want to cash in some or all your investment. If the product has a CDSC, you might have to pay a sizeable penalty to get your money. If that’s the case, ask for a document showing the complete schedule of CDSCs.
- What are the product’s internal costs and fees? These are hidden amounts that will reduce the growth of your investment. Lower costs mean you get to keep more.
LIMITATIONS OR RESTRICTIONS
- Does the product contain any limitations or restrictions? For example, are there restrictions on withdrawals or on payments to your beneficiaries? What about growth limitations?
- Can the investment be sold easily, or at all? If not, you could be left with a problem if you need the money quickly.
- How are gains in the value of the investment taxed when you make a withdrawal? Are they taxed as ordinary income? If you are under 59 1/2, is there any additional tax or penalty? If so, you may pay taxes you had not originally planned on.
THE BOTTOM LINE
Asking thoughtful questions will guide you in making sound financial decisions. Take the time to investigate before you invest. Remember, knowledge = power.