For DIY investors, evaluating new investment opportunities can feel exciting and daunting. The thrill of a promising opportunity often comes with a real set of risks, and without a clear process for analyzing each potential investment, it’s easy to make choices that don’t serve your long-term financial goals. This is where due diligence comes in.
But due diligence isn’t just about numbers—it’s about seeing how each investment fits into your unique financial strategy. WealthFluent’s tools go beyond traditional investment checklists, allowing you to run scenarios, simulate trades, and see the impact of each potential investment on your portfolio’s allocation, risk, and future growth before you commit a single dollar. This practical, step-by-step guide will help you incorporate due diligence into your decision-making, using WealthFluent’s tools to make informed decisions.
Define Your Investment Goals and Test for Fit
Every investment should support your broader financial objectives, but not every opportunity aligns with your risk tolerance or goals. If you’re a DIY investor, diving into high-risk assets without fully understanding your comfort with volatility could lead to a mismatch in expectations and outcomes.
Using WealthFluent, you can start by defining your objectives within the platform. Once your goals and risk tolerance are set, WealthFluent’s Portfolio Management Tool helps you test how a new investment could align with your portfolio. For example, if you’re considering adding a high-growth stock, you can see if that risk exposure fits into your Plan Benchmark’s Strategic Asset Allocation. Does it need an offset in other parts of your portfolio? Do you need to consider selling a similar asset? The Assist tool and Investment Screener can even help you find investments to meet your underweight exposures. By testing for fit within WealthFluent, you can filter opportunities with your objectives in mind, ensuring each choice supports your financial journey.
Research the Investment’s Fundamentals
Due diligence often involves assessing an investment’s fundamentals, such as market position, revenue growth, and risk factors. But for DIY investors, diving into financials without seeing the larger impact on their portfolio can be overwhelming.
WealthFluent’s Trade Scenario feature allows you to input the investment you’ve researched and simulate how the asset might fit in with granular details inside the fund fundamentals. Let’s say you’re interested in a new technology stock. After researching its growth potential, you can add it to your portfolio in the WealthFluent revision tool and test its impact across various scenarios. What happens if the technology sector stock exposure goes overweight with this investment? Seeing the impact of potential changes in your portfolio gives you a clear sense of how the asset’s fundamentals fit with your personal risk tolerance.
This approach helps you move from abstract analysis to actionable insights, allowing you to make informed choices based on how each investment might perform in real-world conditions.
Evaluate Management and Industry Position to Anticipate Long-term Potential
The success of an investment often depends on the strength of its management and its place within its industry. Assessing these intangible factors can be difficult for DIY investors, especially if they invest in an unfamiliar sector.
With WealthFluent’s Portfolio Management Tool, you can enter assumptions about an asset’s management and industry stability and simulate how different scenarios might affect your returns. For example, suppose a company has a strong competitive position but operates in a volatile industry. In that case, you can model potential ups and downs to see if your portfolio can weather these fluctuations. Testing this impact helps you avoid placing too much weight on management success alone by showing how industry conditions might offset even the best leadership efforts.
This simulation allows you to see beyond current performance and anticipate long-term stability, giving you greater confidence in how an investment might support your portfolio over time.
Assess Financial Health and Run “What-If?” Scenarios
Evaluating financial health—such as revenue, debt, and cash flow—is essential to understanding an investment’s potential. However, the bigger question is often, “How will this impact my overall portfolio?”
WealthFluent’s tools allow for What-If? Scenarios for changing your portfolio and considering various outcomes on your portfolio. If you are considering a private placement investment, you can input all the details and even select an appropriate proxy security to model with. These “What-If” scenarios provide a realistic view of how different financial conditions impact your investments, helping you build a resilient portfolio with a clear understanding of each asset’s potential risks and rewards.
Test for Risk Exposure Across Your Portfolio
Understanding and managing risk is one of the most critical steps in the due diligence process. While every investment carries some risk, combining assets in your portfolio can lead to unintended levels of exposure if not carefully managed.
With WealthFluent, you can test each potential investment’s risk impact on your portfolio. For example, if you’re considering adding a high-risk stock exposure, the platform lets you see how this choice impacts your current risk balance. WealthFluent’s 52 risk metrics shows how the investment changes your portfolio’s risk profile, helping you avoid over-concentration in volatile sectors. And as always you can compare to your custom plan benchmark’s risk exposures.
This helps you make balanced choices by showing how new investments fit within your comfort level. It ensures that your portfolio remains diversified and aligned with your financial objectives.
Account for Fees and Hidden Costs Before Committing
Fees and costs can quickly increase, eating into your returns over time. Understanding these expenses fully before committing capital can help you avoid investments that appear profitable on paper but are undermined by high costs.
Using WealthFluent, you can enter an asset’s full cost structure—management, transaction, or performance fees —and assess their impact on your aggregate portfolio. By including these fees in your scenario testing, you’ll get a realistic picture of net returns and can compare fee structures across multiple investments. This allows you to make cost-effective choices, ensuring your investments work harder for your financial goals. Remember, the benchmark measures these fees as well so you have a good measuring stick for these costs.
Consider Tax Implications with Scenario Testing
Tax implications can substantially impact your returns, yet they’re often overlooked in the excitement of a new investment. WealthFluent helps you account for tax considerations by allowing you to run scenarios that factor in taxes on potential gains, dividends, and account type. Asset location is strategically placing investments in tax-advantaged or taxable accounts to minimize tax exposure. Many do not know that even private placement investments can be held in a Self-Directed IRA.
Let’s say you’re evaluating a high-dividend stock. WealthFluent lets you see how gains from dividends might reduce your after-tax returns, helping you decide whether to hold it in a taxable or tax-advantaged account. With this insight, you can maximize tax efficiency and choose investments that support your net returns more effectively.
Bringing It All Together: Scenario Testing with WealthFluent
Due diligence isn’t just about evaluating individual investments; it’s about understanding how each choice impacts your overall strategy. WealthFluent’s portfolio scenario testing and simulation tools help DIY investors surpass traditional checklists, allowing you to model investments in real-world conditions before committing capital. You can approach each opportunity with clarity and confidence by testing potential impact, risks, fees, and tax implications.
WealthFluent’s approach equips you with the tools to make better investment decisions and provides the insights to build a portfolio that aligns with your financial goals. With each investment scenario mapped out in detail, you can make data-driven choices, optimizing your portfolio without unnecessary risks.
By incorporating WealthFluent’s tools into your due diligence, you avoid common pitfalls and build a robust strategy for long-term growth. Take charge of your financial future with the confidence that each investment is a step forward on your journey to wealth and independence.
