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One of the most challenging parts of signing up for a 401(k) plan or opening a Roth IRA is deciding which investment to put your money into. There can be dozens of options within your 401(k) plan and many, many more within a Roth IRA.

Of course, there are lots of聽possible聽questions to ask about an investment, and countless investment guides will give you lots of things to look at and think about. The problem is that they often give you聽too much聽to think about, leading to analysis paralysis.

How do you weed through all of these choices and figure out which investments you should be using? Here are five simple questions I use to figure out what investments I should be putting my money into. I try to answer each of these questions before I examine an investment.聽

What is my goal?
This is the absolute first question you should ask yourself before looking at any investment of any kind. If you don鈥檛 have a goal in mind, investing is much like tossing darts in the general direction of a dartboard while blindfolded. You might get lucky and hit something, but you鈥檙e more likely to find that you鈥檝e completely missed the target.

Why are you putting this money away? When do you expect to utilize that money?

Let鈥檚 say we鈥檙e looking at retirement, which is the goal many people have when they鈥檙e retiring. The goal of retirement comes hand in hand with a target date 鈥� usually somewhere around 65 to 70 years of age. The number of years until then depends, of course, on how old you are.

On the other hand, let鈥檚 say we鈥檙e investing because we want to open a little restaurant on Main Street. Your goal is to have enough money saved in five years to give it a real go.

Why is a goal important?聽Having a goal establishes your timeframe, which is a vital part of figuring out how to invest.聽Generally, you should only compare investments that you鈥檙e considering to support the same goal.

贬辞飞听volatile聽is this investment?
This leads right into the first specific question you should ask about an investment: how聽volatile聽is it? How rapidly does it go up and down? Generally, the closer you are to your goal, the less volatility you should accept in your investments because you can鈥檛 afford a big drop right before you arrive at your goal.

How do you check this? When I鈥檓 looking at investments, I find out what the annual rate of return has been for the past ten years for that investment. I then take the highest number and the lowest number and use them as a basis for comparison.

Generally, I鈥檓 willing to accept a 4% difference in those numbers for each year between now and the absolute final date for my goal. So, for example, if I look at an investment and the high number is 20% and the low number is -30%, that鈥檚 a difference of 50 between the numbers. I鈥檓 willing to accept that much volatility if I鈥檓 more than 12 years out for my goal. Otherwise, I move on to something less volatile.

This is a very simple way to check for volatility 鈥� there are many more sophisticated methods out there. However, this method does a pretty good job for its simplicity and it鈥檚 easy enough for almost anyone to understand it.

What I鈥檝e found is that it allows me to invest in bonds more than 1-2 years out from my goal and opens the door to stocks starting at the eight or nine year mark.

What if you鈥檙e considering multiple investments? If you鈥檙e dividing the investments into equal pieces, then it鈥檚 pretty easy. You can 鈥済o over鈥� your target on some pieces of the investment as long as you 鈥済o under鈥� on other pieces.

So, if you鈥檝e got a 10 year timeline and you want to put half of your money into something aggressive and half of it into something safe, then you just want to make sure that the聽total聽difference on both investments is 80 鈥� an average of a 40 difference between the high and the low for each investment.

What are the fees on this investment?
This is the very next question you should ask.

All investment companies make money by charging some kind of fee on their investment. Usually, it鈥檚 an annual fee, expressed as a percentage of the value of your account. If you鈥檙e in an investment that has a 1% annual fee, what will happen is that over the course of a year, the company holding your investment will claim 1% of that investment for themselves.

Obviously, you鈥檙e going to want lower fees. I consider this the number one sticking point when comparing investments of similar volatility, since you simply don鈥檛 know how the investment will really perform in the future. What you do know is how much they鈥檒l be taking from you 鈥� and you want that to be low.

Generally, investments described as 鈥渋ndex funds鈥� have pretty low fees, as they don鈥檛 cost much for the company to manage. I consider them to be pretty good deals.

What is the long term history of this investment?
The next question you should ask is what the long term history of these investments are. The big thing you鈥檒l want to find out is聽how much, on average, these investments return each year.

Once you figure out investments that are acceptably volatile for you, you鈥檙e going to need to compare them carefully, and knowing how well they return is key.

I usually look at the average of the annual growth over the last ten years. This is usually found right in the basic information about an investment. I don鈥檛 really think too much about shorter terms than ten years.

It is important to note that past results do not guarantee future returns, which is why this is not the be-all end-all of tools to measure investments by. It just gives you a sense of how they鈥檝e done in the past.

How diverse is this investment?
A final question to ask yourself is how diverse this investment is.

Is it an investment in a single item, like the stock of one company? That鈥檚 not very diverse 鈥� you should own a lot of different investments.

On the other hand, you might be looking at a fund that鈥檚 made up of the stocks of聽lots聽of companies. That鈥檚 much more diverse.

Not only do you want to own a wide variety of investment types 鈥� stocks, bonds, and so on 鈥� you also want a lot of variety within those types. You don鈥檛 just want to own one company鈥檚 stock, because if that company runs aground, you鈥檒l be wiped out.

Generally, after looking at these questions, I have a good idea of what I should be investing in. For my retirement investments, for example, I found myself in 鈥渢arget retirement鈥� index funds at Vanguard, which had acceptable volatility, a聽ton聽of diversity, solid annual growth, and really low fees. It did well in terms of all of the questions I was asking, so it鈥檚 what I chose to invest in.

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