Is That Investment Right For Me?

Make sure new investments fit with your overall financial plan and goals.

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Roger Wohlner
I'm often asked if a particular stock or mutual fund is a good investment. But unless the person asking the question is a client, the answer is always "It depends."

A good investment should always be defined in the context of your financial goals and risk tolerance. What may be an appropriate investment for one person might be inappropriate for another. The better question is not whether a particular fund is a good investment, but rather whether that fund is a good fit for your overall financial and investment strategy.

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Over the years, I have encountered many folks who have an array of stocks, mutual funds, and other investments scattered over a variety of accounts. There is no overall plan for their portfolio. Instead, they have a collection of investments I call financial clutter. The investments are not aligned with their overall financial goals or any sort of financial plan. There is often a lot of overlap among holdings and not much real diversification. This can place their portfolio at significant risk during a market downturn.

In trying to determine if a particular investment is right for you, consider the following approach:

Start at the macro level. The first step in organizing your investments is to take a look at the big picture. I generally start with an Excel spreadsheet with the client's accounts across the top and the holdings, categorized by investment style down the left side. My goal is to get a picture of the overall portfolio by investment style and account.

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Compare your current allocation to your target allocation. As I tell anyone who will listen, the first step in investing is to have a financial plan in place. If you do, compare your allocation to your plan. If you don't have a financial plan in place, spend the money and hire a competent financial adviser to help you prepare a plan.

Drill down into the detail. Now it's time to evaluate the individual holding you are considering. Review funds and exchange-traded funds (ETFs) against their peers in terms of performance and expenses. For active funds, is the manager responsible for the fund's track record still in place? Has the fund gained or lost a significant amount of assets in recent months? Take a comprehensive look under the hood. Then ask yourself, "Does this holding fit in terms of my overall strategy?"

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Is this a good investment for me? A simple question, maybe. The answer, however, is far from straightforward.

Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill. where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. He recently cofounded Retirement Fiduciary Advisors to provide direct investment and retirement planning advice to 401(k) plan participants. Follow Roger on Twitter and LinkedIn.