In order to define what makes a good investment, we need to be able to define what a good investment is. Investors tend to measure or analyze investments solely based on returns. However, this is certainly not the best way to determine whether an investment is good or bad. In order to analyze an investment, we need to be able to consider and compare not only its returns but also a risk, and other variables.
Obviously, the returns generated by investments should be measured and compared. However, returns should not be compared without any context. In fact, different investments will often generate very different returns based on the risk that is associated with each of these investments. Some assets tend to be riskier. Within each asset class, there are also some investments that are naturally riskier, and therefore will be able to generate higher returns.
For instance, comparing a tech stock with a utility stock based solely on returns does not seem to be a fair comparison. The future growth of both companies will be entirely different, and so will the risks. Therefore, they will have valuations that reflect their expected growth and the risk associated with each of these companies.
Risk is an inherent component of investing. To measure returns, and to make a good investment, we need to find opportunities that are appropriate for ourselves. This means picking investments that reflect the amount of risk we are willing to take. In order to invest successfully, not only do you need to choose a good investment based on risk but also to be aware of your risk tolerance and risk capacity.
Time should also be considered when we compare different investments. Some investments may take too much of your time. If your time is valuable and you have to invest too many hours researching an investment whose expected return is low, it might be a better solution to simply give up on it completely. Being aware of this will you make you focus on investments that you are able to pursue efficiently. Your return on time invested should also be considered in order to make a good investment.
An important factor to also consider is your investing approach. As it should be aligned not only with your investor profile but also with your investment goals. Some investors look for short-term opportunities, others think in the medium to long-term. Being aware of this and analyzing investments based on your approach is essential to being successful. This is common across different asset classes. For example, some real estate investors are looking to flip houses, while others are long-term holders. The same happens in the financial markets. Some traders do scalping, while there are also dividend growth investors who will never sell their portfolio.
Therefore choosing investments there are aligned with your approach is extremely important.
Price and valuation
Both the price and the valuation of a particular investment are absolutely crucial, in order to be deemed a good. Buying low and selling high seems easier said than done. However, it can be practiced. In order to do so, you will need to accurately price or value your investments. You will also need to constantly manage your emotions. Preventing you from overpaying for a particular investment.
How does it fit in your current portfolio?
When you consider an investment you should not consider it individually. Instead, you should try to understand how such an investment would fit into your current portfolio. Would it diversify the portfolio? Are you reducing your overall risk? These are important questions to address and to consider investing in an asset you should also consider how it could impact your portfolio.
Understand the difference between investing and speculating
This is one of the most common investment mistakes. Some investors do not fully understand the difference between being a speculator and an investor. There is nothing wrong with speculating on the price of a particular asset. However, you cannot expect to be making a long-term investment when in fact you are just speculating on short-term price fluctuations. Being aware of this, and adjusting your portfolio accordingly is essential to make a good investment.
Investing always starts with extensive research. Whether you are analyzing stocks, and you go through the financial statements of the company, or you are a real estate investor and decide to inspect every little detail of the property. Actively researching your investment is perhaps the single most important aspect of making a good investment. When you research investments, you are much more aware not only of the potential upside but also the risks associated with it.
Making the right investments during your life can really set you up financially. When it comes to making good investment d
Since we have mentioned both stocks and real estate, there is another factor to consider when making a good investment - liquidity. As a rule of thumb real estate tends to be an illiquid investment. Stocks, on the other hand, tend to offer a lot more liquidity. This should be considered especially depending on your investment horizon. If you are investing for the long run, and plan to hold a specific investment for many years to come, you could choose an illiquid investment. However, if by any chance you might want to sell your investment fast, liquidity is important. You should also keep in mind that there are also stocks that are highly illiquid.
Image source: Unsplash