We all know investing is crucial to build wealth, to lead a comfortable life in the future. There are many different ways you can invest, but not all of those are good—the traits of a good investment opportunity separate from a poor choice.
This article will discuss some of the traits of a good investment opportunity that will help you avoid disappointment. Using the input as a checklist, you will be able to avoid investments with a high chance of failure and select the ones that would earn you a fortune.
Why should you invest?
Investing is the simplest way to reach your financial goal and attain financial freedom. With the interest rates falling in the current situation and inflation growing, putting money in saving schemes can’t keep pace with rising prices or the declining value of money. For this reason, everyone must consider undertaking some risks via a diversified investment portfolio.
But the investment is treacherous water. There are numerous alternatives available for investing, but not all are equally good, and before you realise it will bleed you dry. As more investment options are opening before investors, they need to be careful about choosing the option to line the purse. Understanding the differences between good and bad investments, therefore, makes a critical study.
Let’s discuss what a good investment is and what separates a good investment from a bad one.
What is a good investment?
When we talk about good and bad investment, a question naturally comes to our mind: What is a good investment? There are several characteristics of a good investment opportunity that separate it from the other available choices. One such factor is risk and return.
The amount of risk on your portfolio should be limited. Periodic volatility and losses are typical in investment, but the chances are narrow in the case of a good investment. Good investment options will hold their value in the long run, irrespective of market volatility. This will ensure that you get a good return while existing.
Things you need to consider while evaluating an investment option are,
- Long-term viability
- Predictable outcome
- Earning consistency
- Demand for the product
- Fair price
Characteristics Of A Good Investment
We have discussed below the characteristics that separate a good investment from a bad one. While investing, keeping this checklist handy will help you exercise caution.
When talking about investment, we look for long-term options to help our investment grow with time. If you look at a company stock and can’t see yourself owning its stocks ten years from now, you must avoid investing in it. Why? Because most of the money comes from staying invested for the long term. Good stocks will generate more value in the long run and don’t require you to frequently recalibrate your investment.
Did you ever wonder why some company stocks have a higher value than others? Company share prices in the market depend on the financial performance of the company. Analysts use several ratio analysis to arrive at a fair price of company stocks. As an investor, knowing about the evaluation that goes behind will help you differentiate a good investment option from the poor ones.
Being said that, a company track record in the industry has a critical role to play. No matter how much you like the idea behind a company, it is not worth investing if it doesn’t generate a good return.
The market isn’t always fair. Sometimes individual investment options are overpriced because of various market factors. Good investments enjoy higher demand, therefore, sold at a higher price. But if you overpay for a good investment, you are putting yourself at a disadvantage.
While investing, you need to decide which is the fair value for the investment. Rather than being caught in market sentiment, investors should look at the best time to invest at an attractive price.
To determine the fair price, investors consider historical data to compare it with the current valuation. Sometimes, you can justify paying a premium for investment when the reasons behind are well explained.
Price Of The Underlying Increases Overtime
In good investment, the asset price will increase with time. It happens when the company or the asset produces something that’s in demand. However, it doesn’t mean that one must only invest in blue-chip companies. Any company that has good potential to grow along with the market is the right investment choice – provided you buy it at the right time.
Diversification is a simple way to turn your investment into a good investment portfolio. Diversification means buying different asset-classes with varying degrees of return. Mutual funds and ETFs come with the inherent quality of diversification. Funds spread across various sectors promise better diversification and disperse return under different market conditions; means your portfolio will continue to earn return irrespective of market condition.
Even when we like the idea of remaining invested in the long run, we don’t want to be stuck in it. Modern investors prefer liquidity, which allows them to exit at their will and recalibrate if needed.
One of the prominent traits of a good investment opportunity is that it enjoys high demand. Different types of investment have different degrees of liquidity. Large-cap stocks and ETFs are traded daily in the exchange.
In a portfolio, you must add both liquid and illiquid investment. Illiquid investments are not listing in the market means they don’t have real-time pricing and hence, less volatile. It also prevents you from making impulsive decisions. Including both liquid and illiquid investments in your portfolio will help with effective risk management.
An ability to grow in value means that the investment is profitable. However, some assets don’t grow in value, but they grow in yield, like dividends from shares or coupons on bonds. These investments generate passive income for you.
But while selecting an investment that grows in value, be mindful that sustainable cash-flow options are only viable for long-term investment.
Now that you have learned the characteristics of a good investment, you can pick the right ones that will line your purse. But, as it is common with investments, sometimes they don’t go as planned, which makes us wonder, can we turn a poor investment into a good one?
If you are stuck in a mediocre investment, one thing you can do is existing it before you lose all your money in it. Occasionally there may be a chance to turn a poor investment into a good investment – you need to evaluate an option to exit and reinvest. If that is not an option, then quitting it is the best choice. In the case of ETF and other managed funds, you need to consider if your portfolio is performing poorly because of market sentiment or other factors. If it is because of the market, it may be worth being patient.