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How to know if an investment is suitable

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Investing provides a way to increase your money, save for retirement and help you reach financial goals. Of course, not all investments are created equal. Some investments prove more lucrative, and some investments are unwise. Here are some ways to determine if you are making a sound investment.

What makes a suitable investment?

According to Investopedia, an investment is considered suitable if it represents the level of risk an investor is comfortable with, and it makes sense given the investor’s circumstances. In other words, a broker should not recommend an investment just because you are comfortable with risky investments. A suitable investment also makes sense for your situation.

For example, someone who is about to retire should not have their entire portfolio tied to the futures market. A person nearing retirement needs investments that are going to pay out soon, not ones that will not have growth for years.

Suitable investments also consider other assets

However, what is suitable for each investor is not always clear cut. Putting all your assets into the stock market is certainly not a suitable investment. But where is the threshold of what makes sense? Would investing 50 percent of your money be considered a suitable investment?

This likely depends on your other assets. Perhaps you own real estate and have a large retirement account. Then it may make sense to invest more of your assets. Another essential element of suitability is asset allocation. Investors should have a diversified portfolio to spread out the risk.

You should understand the investment and the risk

The Financial Industry Regulatory Authority (FINRA) requires that a broker have a reasonable belief an investment they are recommending meets a client’s needs and plans. However, if you do not understand an investment being recommended to you, it is hard to know if it is the right choice or to fully understand the risk involved. If your broker advises you to invest in something you do not understand, you should ask if there is a simpler option that may prove more suitable for your objectives.

If your broker advised you to invest in an unsuitable investment, it is possible to hold him or her accountable for your losses. You must prove the investment was unsuitable, and your broker did not clearly explain the risks involved.