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Are You Asking “Get to Know You” Questions Before Investing?

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Are You Asking "Get to Know You" Questions Before Investing?

In the world of online dating sites and phone apps, let’s face it, appearance matters. First impressions are formed on a handful of photos and limited character count, but anyone who has spent time in the online dating scene knows that the pictures painted by potential suitors don’t tell the whole story.

Choosing investments in your 401(k) or other company plan is a lot like online dating. You are provided with a list of names to choose from, a bit about their heritage (stocks or bonds, domestic or international) and some information about their past (performance).

Just like with dating, you don’t want to rely on an online profile to make this important decision. Ask these “get to know you” questions about your investment options before making your selections:

What’s On The Inside?

Mutual fund names tell you very little about how they are actually invested. View the prospectus to learn more about the make-up of the fund or ask your financial advisor to take a look for you. If you aren’t familiar with the “insides,” you could be missing out on opportunities or doubling up on similar funds, providing little diversification.

Will It Get Along With Others?

Chemistry is important in a partner, but he or she also needs to fare well with other people in your life. The same goes for your investments. If you and your spouse both have retirement plans or investments outside of your company plans, it’s important to make sure they all work well together. Perhaps your husband’s plan offers the best small-cap fund and yours has a great large-cap fund. Rather than buying sub-par investments in both plans, allocate across plans to get access to only the best fund options.

Should I See Other People?

Although the goal for dating is to find “the one,” the goal for investments is to diversify risk through multiple partners. How many investments you choose, and what type, all depend on your target asset allocation. Where you choose to hold the investments will depend on account types and fund options available.
Will I Feel Safe? Depending on your tolerance for risk, racecar driving may be a relationship deal breaker. Risk should also be considered when selecting investments. Don’t just rely on the return figures provided online. The fund with the highest return may also be the one with more ups and downs than you can stomach. Ask your financial advisor to review risk measures like standard deviation and sharpe ratio to see if you will feel safe in the relationship.

Making Sense

Annuity:  A contractual investment, primarily with an insurance company.  The two primary benefits of purchasing an annuity are tax-deferred growth and/or guaranteed income, although they may include a number of optional benefits or “riders” that are available for an extra charge.  Given their relatively higher fees and long holding (surrender) periods required to maximize benefits, it’s important to carefully consider the purchase of an annuity product in light of your current and future needs.         

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