Investing 101

Last year's strong stock market lured speculators and savers alike to the offices of stockbrokers and financial planners. But choosing the right financial advisor is at least as important as selecting the investments themselves. A bit of preparation before you meet with a potential advisor can save you a lot of headaches later.

At the first meeting, be prepared to share some general information about yourself, such as family status, financial resources and goals. The advisor should also ask you these questions:

1. What do you want your money to do? Do you seek high monthly income from your investments? Do you want them to grow now and pay later? Or would you like to achieve both goals?

2. What are your expectations for a return on your investment? Almost any financial goal can be reached if sufficient time is available and an appropriate level of risk is allowed.

3. What is your risk tolerance? Although the old adage "No pain, no gain" is often true, don't let this attitude prevail with your hard-earned money.

4. What time frame do you have in mind for achieving your financial goals? Don't expect to double your money with no risk in six months. If someone tells you they can perform this feat or anything even remotely close, run for the door.

5. How much contact with me do you expect? If your investments involve a group of highly rated mutual funds, a semiannual review might be sufficient. If you prefer stocks, your contact should be more frequent. Let the advisor know what you expect, and be sure both of you are comfortable with the arrangement.

6. How much time do you want to devote to managing your money? A hands-on approach is needed for a stock portfolio, even if you have a financial advisor. Mutual funds or professional money management are far less time-consuming.

Some additional considerations:

1. Don't work with a financial advisor or broker who tells you that if you don't invest now, you'll never get another opportunity. Stocks go down as well as up, and you must feel comfortable with the situation before you invest.

2. Don't invest in anything you don't understand. You should understand your advisor's recommendations so well that you can clearly explain them to someone who understands even less than you do.

3. Don't be afraid to ask the price of advice. A client of mine confided I was the second broker she had interviewed. When she asked the first candidate what his services cost, he replied, "If you have to ask, you can't afford it." He was right: No one can afford to work with a jerk!

4. Don't use an advisor without investigating his or her reputation. Call the National Association of Securities Dealers at (800) 289-9999. Their hotline can tell you if there have been customer complaints about or disciplinary action against a registered representative.

No matter whom you decide to work with, be sure you feel comfortable enough to ask questions. This may be all the money you'll ever have, and the financial advisor you choose should be as interested as you are in doing the best you can with it.

This article was originally published in the January 1996 print edition of Entrepreneur with the headline: Investing 101.