What is investing? More importantly, how do you make a good investment decision that would make money fast?
Well, let’s say it is the act of assigning resources (that would be money) into assets with the hope of gaining some profit in the end.
There are numerous kinds of investments ranging from savings accounts and fixed-term deposits to property shares on the stock market. And there’s plenty more from where that came from.
The kind of investment that every person chooses depends on their circumstances and needs and their goals and interests. There’s no one-fit-for-all when it comes to investments, and that is why you have to consider some essential factors before making important investment decisions.
After all, you would want your hard-earned money put to its best use so that you can get the best financial returns with a low chance of having to suffer through a loss.
That’s why it’s essential to know how decisions are made, the investment decision process, and the investment decision rules you should make sure to follow.
What to consider when making an investment decision
So here are five things to consider to make sure you make the best investment decision for yourself.
1. Do you have a personal financial roadmap?
Before you jump into making any investment decision, take a deep breath, sit down, and look at your current financial situation from start to finish. For this, you will have to be honest with yourself, especially if you have never made a financial plan before and are entirely new to this.
The first step to having a successful investment experience is to figure out your goals and risk tolerance – how fit is you to manage the worst-case scenario if dealing with a financial loss or burden.
Because the truth of the matter is that there is no guarantee whether you’ll make enough money from your investments, that’s why you’re going to have some backup plan or a financial professional that can help you navigate through any tough waters.
So make sure you get the facts straight regarding saving and investing and have an intelligent and well-thought-out plan ready to execute. This way, your chances of gaining financial security through your investment decisions over the years will be high, and you will be able to reap the benefits of good money management.
2. What’s your risk comfort zone?
Every investment decision you make will come with some degree of risk. Let’s say you purchased securities – anything from stocks, bonds, or mutual funds – then it’s going to be crucial that you fully understand before you invest that you could lose some or all of your money.
Let’s break this down further as to why. So unlike deposits at FDIC-insured banks and NCUA-insured credit unions, the money you invest in securities is usually not federally insured. That means even if you purchase your investments through a bank, that risk will remain.
It’s not all gloom and doom, though, because the reward for taking that risk is worth it. You have the chance to see a more significant investment return that will take you closer to your financial goals. If you’re looking at short-term goals, it’s better to invest solely in cash investments. The risk for investing in cash equivalents is inflation; it may outpace and erode returns over time.
3. Exert caution when investing heavily in shares of employer’s stock
Never place all your eggs in one basket – this applies to investments as well. That is why you have to make sure to diversify them. You can do this by picking the right group of investments within an asset category. This will help greatly limit potential losses and reduce the risk of your investment returns fluctuating without sacrificing too much potential profit.
If an employer’s stock or individual stock ends up doing poorly or if, by chance, the company itself goes bankrupt, then you’ll end up losing a lot more money and even your job. This is why exposing yourself by investing too heavily is not the best idea here.
4. Consider dollar cost averaging
There is an investment strategy known as ‘dollar cost averaging,’ It allows you to protect yourself from the risk of investing all your money at the wrong time. This is done by having a consistent pattern where you add new money to your investment over a significantly longer period.
This leads to you making regular investments with the same amount of cash each time, so you will buy more of an investment when its price is low and less of the investment when its price is sky-high.
People who usually make a lump-sum contribution to an individual retirement account end up disadvantaged. It would be better to consider this strategy, especially when the market is volatile.
5. Rebalance your portfolio occasionally
What does rebalancing your portfolio mean? This is the process of bringing your portfolio back to your original asset allocation mix. So by rebalancing, what you do is ensure that your portfolio does not overemphasize one or more asset categories, which helps return your portfolio to a more comfortable level of risk.
Plenty of financial experts recommends that investors rebalance their portfolios at a regular time interval. This could be perhaps every six months or twelve months. There are two ways through which you can rebalance your portfolio, one of them being based on the calendar and the other being based on your investments.
One of the significant advantages you get from this method is that the calendar becomes a reminder of when you should consider rebalancing. In addition, your investments will be able to tell you when to rebalance as well, and in either case, the best results will come up when done on an infrequent basis.