Questions investors must ask

INVESTORS must ask themselves some fundamental questions about their investment goals.

*What is your time frame for investing? Are you a long- or short-term investor?

*Have you minimised risk through diversification? Ultimately, maintaining a diversified and balanced portfolio is key to maintaining an acceptable level of risk and reaching your financial goals.

More generally, you should also understand how your overall portfolio is tailored for risk. There is no better way over the long term to distribute risk than to diversify your investments.

Now, some years or some markets will outperform a diversified investment strategy in the short term. That is just a fact. But do not forget that investors who boast of fantastic returns by investing in a single stock or one sector have also assumed the higher risks of a more narrow investing strategy.

Another way to diversify your risk profile is to consider mutual funds. But like any investment, before choosing a fund, do your homework.

*Remember that past performance is no guarantee of future performance.

Today, it seems you cannot open a newspaper or read a magazine without seeing ads promoting the stellar performance of `hot' mutual funds. Be aware however that a fund may have invested early in a few successful IPOs giving the fund unusually high returns. Or maybe a fund had an extraordinary year or two, but over the longer-term, has not done as well as recent returns suggest.

*Scrutinise fees and expenses: Over time, expenses and fees can really make a difference. You should also consider the effect taxes will have on your mutual fund returns. Earlier this year we adopted a new rule that requires funds to provide you with that information.

*Most importantly, do your homework. Research what you read and hear about potential investments. Unfortunately, it is not always just separating good information from the bad, often it is a question of gauging objectivity or bias, or salesmanship from honest advice. I have heard some Angelinos tend to spend more time choosing a cell phone plan than researching their investments. Whatever you do, do not just invest based on a `tip'. There is lots of solid investment information available today -- consult it and use it before putting your money at risk.

Investors will always need access to high quality information to balance their investment objectives with their tolerance for risk. Even in an electronic age, no technological advance can ever alter the fundamental relationship between risk and return. The timeless principles of investing still apply. Remember the mantra!

(Edited extracts from a speech by Ms Laura S. Unger, Commissioner, US Securities & Exchange Commission)

(Source: www.sec.gov)