There are lots of ways that investment opportunities can grab the attention of potential investors. However, not all of these assets are worth investing your hard-earned money in. It’s up to you to conduct your own background research to make sure that you understand what you are investing in and what the potential outcomes are.
Whether you are at the beginning of the investment process or are wanting to brush up on your skills, it’s a good idea to review your investment practices. Investing can give high rewards, but it can also be a dangerous game if you aren’t careful with your financial decisions.
In this guide, we’ll walk you through some of the characteristics to look out for with potential investment opportunities to help you establish if they have good prospects. We’ll also look at the traits that are often seen in bad investments and the factors you should consider before you part with your money.
What are the traits of a good investment?
Many good investment opportunities have at least one of the following characteristics. They may help you to select better investments that could result in a good rate of return.
Depending on your investment strategy, you probably don’t want to overpay for an investment. Most efficient investments that result in a good rate of return should be bought at a reasonable price. Ideally, your portfolio should provide the best returns at the lowest price possible, so it’s essential that you monitor your investments to see whether you can make improvements to your portfolio diversity.
Although high-risk investments can result in good returns, you should try to avoid risk when and where possible. A well-structured portfolio will deliver the results you expect with as minimal risk to your finances. You also need to weigh up the potential outcomes so that you know that you are prepared for different results.
You should be able to adapt your portfolio and make the necessary changes with minimal fuss. Good portfolios are simple and avoid unnecessary components. You should be able to make decisions based on a quick review of the performance of your investments. Ideally, you should try to make as few transactions as possible each year.
It’s important that you fully understand your investments and your portfolio’s various elements. You don’t want to enter into an investment without having done proper research, otherwise, you may find that the asset is not as valuable as you first thought.
What are the traits of a bad investment?
While registered investment advisors (RIAs) must legally act in your best interest, this is not the case for brokers. The Financial Industry Regulatory Authority (FINRA), which some brokers are registered with, enforces a rule that “requires a broker to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors”. However, the term ‘reasonable’ basis is open to interpretation and could mean that some brokers recommend investment opportunities that could prove beneficial to them too.
If you find that an investment opportunity could earn a large commission for your financial advisor, it may be that they have overlooked an alternative investment that could prove more suited to you.
Another mistake that many novice investors make is investing in popular assets just because other people are investing in them. Panic buying can make people invest more than they would usually feel comfortable with. Once the excitement has passed and people start to sell their assets on mass, markets can crash and the rate of return can dramatically drop.
Investments that require you to keep your asset for an extended period of time before you are able to sell them are also best avoided. You won’t be able to sell the assets based on when you need to, which could have a detrimental effect on your finances.
What should I consider before investing?
Before you think about investing, you need to prioritize any debts that you have. The rate at which you are paying interest on your loans will likely be higher than the rate of return from any investments you have. For this reason, you need to pay off your credit card debt and any other loans that you have before you consider making investments.
It’s also a good idea to maintain an emergency fund in case something unexpected happens. This could include redundancy or a health issue. A change in your personal circumstances could affect your finances, which is why it’s helpful to have a fund that you can fall back on. Many experts recommend that you save between three and six months’ worth of wages in your emergency fund.
Your retirement is also an important aspect to think about. You need to make sure that you can still make monthly contributions to your pension fund if you decide to invest.
Most workplaces offer a pension scheme, but it’s even more important to consider your options if you are not enrolled in one. While your retirement may seem a long way away, you don’t want your pension fund to suffer because you are sacrificing funds to put into investments.
Once you have established your current financial situation, you need to think about what your financial goals are. You need to think about what your boundaries and risk levels are so that they can form the base for your investing decisions. It can be tempting to invest in accounts with high-risk levels in the hope of earning large rewards, but these can have dire consequences if you aren’t experienced with investing.
Why should I invest?
Although having savings is important, investing is an effective way to make your money work for you and could help you build your finances far quicker than a savings or current account could. If you are careful with your investing, you could avoid the negative consequences of inflation and potentially watch your investments increase in value.
Everyone’s financial goals vary, especially through different stages of their lives. Individuals who are young and at the start of their careers won’t have too much to invest as they won’t have built up their finances. However, this is also the age that you can take more risks as you likely won’t have as many financial responsibilities or significant funds to lose.
Most people start to plan for their retirement when they reach middle age, which is at the time that you may want to start seriously investing. This can help you to build up your portfolio over several decades, as you improve your investing knowledge and ability to spot a good investment opportunity.
You may decide to be riskier with your investments when you are younger, as there is a chance that you could earn higher returns. However, as you get older, your personal tolerance of risk may change as you start to choose lower investment risks. You can put your retirement savings into investments so when it nears the time that you want to stop work. This means that you can still earn an income from your portfolio of investments.
Investing is also an important aspect of building a business. Most entrepreneurs and small businesses need investors to help them develop new products and services. While investors may not initially see much return, once these small businesses start to grow and become successful entities, the investors are some of the first people to benefit.
What are the types of investment strategies?
The four investment styles are active, passive, value and growth. You can adjust your strategy based on your financial goals and your individual risk levels. Active investing may mean that you want to make higher risks and carefully monitor market trends. This is usually adapted by people who aren’t currently concerned with their long-term investment goals and who would rather base their investing on the current state of the market to make a short-term profit.
Passive investing is used by people who are more conscious of their long-term financial goals. Rather than monitoring the market to try and make a good return as soon as possible, passive investors will try to build a reliable portfolio. While this may result in lower returns, the diversification of their portfolio usually comes with lower risks too.
Another popular investment style is based on growth. This is when someone may invest in a company that has fast-earning stocks that are expected to grow. While these stocks may be viewed as overvalued and have a significant price-to-earnings ratio, they usually pay a low dividend. They also have the potential for a strong return.
The opposite of a growth strategy is one based on value. While growth strategists try to find stocks that are overvalued, value strategists aim to uncover stocks that are undervalued or out of favor. These investments may prove more valuable in the future, which is why they prefer to buy them before they become too popular. Buying stock for less than its value could result in better returns in the future.
How can I create a good investment strategy?
Diversity is one of the best ways to build a good investment portfolio. You can help protect yourself against significant losses by investing in varying opportunities. The major asset categories – stocks, bonds, and cash – haven’t historically moved up and down at the same time. This is because market conditions that benefit one asset category can have a detrimental effect on one or both of the other asset categories.
Investing in various asset categories reduces the risk to your overall portfolio and could benefit your return rate. You will also be in a prime position to balance out your account if one of the asset categories suffers as the other two categories will likely be in a good position.
In the same vein, it’s not a good idea to invest too heavily in one company. This may result in good returns if the company flourishes, but it also means that your finances can be hit hard if the company struggles or goes bankrupt.
Allocating your investments properly is important because you want to make sure you are meeting the right risk level. Taking too many high risks can be detrimental to your finances, but low-risk investments are unlikely to result in a large enough return to meet your goals. For example, low-risk investments may not provide a good return if you are planning to rely on them to retire.
A popular investment strategy is “dollar cost averaging”, which can help you to protect yourself from investing a large sum of money at a poor time in the market. The idea is to consistently invest the same amount of money at regular intervals. Following this principle means that you are benefiting from a better investment when the price is low, but you won’t be investing lots of money when the price is high.
However, while this strategy does have it’s advantages, it’s important to remember that this strategy may not always result in a profit or necessarily protect you when share prices fall.
Below is an example of how the dollar cost averaging strategy would work if you decided to invest $100 on a monthly basis for five consecutive months.
|Month||Investment||Share price ($)||Units purchased||Shares total||Total value|
|Total amount invested=||Average share price=||Total units purchased=||Investment value||P/L|
It’s important that you establish an investor due diligence process when it comes to making decisions about your investment portfolio. You need to establish the level of investment risk that you feel comfortable with, along with your short-term and long-term financial goals. These factors can impact which assets you want to invest in and could help you decide whether an investment opportunity is something that you want to consider or not.
As a potential investor, it’s your responsibility to understand the ins and outs of your portfolio. You need to regularly update it and make sure that you are happy with the results that your investment strategy is giving.
You need to review your financial statements to see if your assets are giving a good rate of return. As you become more familiar with your financial records and current investments, you will start to recognize the traits (both good and bad) to look out for to help you establish whether potential investment opportunities are as good as they initially seem.