Investment refers to any activity in which you put in money for getting a return in the form of profit or for accumulation of money. There is absolutely no shortage of investment opportunities these days and people can weigh the pros and cons of various options before deciding where to put in their money. There are usually three outcomes of making an investment, which are:
You make a profit, which means that you get more money than you invested.
You make a loss, which means that you will not get the full money you put in.
You will be able to maintain your money, which means no profit or loss.
Whether it is individuals or businesses, the sole purpose of making investments is to earn a profit. However, this can only happen when some factors are considered before making an investment decision. What are these factors? Important ones are outlined below:
Do some preliminary research
Before you start any project or put your money in anywhere, it is always a wise decision to get all necessary and relevant information about it. Not only do you need to check the legality, but also the authenticity of the investment. It will be a waste of time and money for you to consider investing your money anywhere if acceptable business laws are not applicable.
Conduct an assessment of your financial situation
Before you decide to commit your funds to any project or investment vehicle, it is recommended that you conduct an assessment of your financial situation. Check your liquidity to see the maximum amount that can be invested without causing you any issues. There is no point in investing money into something that you will not be able to see through. Furthermore, do not invest in anything that can have an impact on your financial situation because if there is a loss, it can lead to bankruptcy and other problems. Only invest an amount that you can afford to lose.
Perform a risk analysis
We have all heard the business rule that the higher the risk, the higher returns. Nonetheless, this doesn’t guarantee that high risk projects will always give you a high return on investment. You need to do your due diligence to ensure that there is a good probability of you getting a return. An investment that pays back in a shorter period of time is a much better option than one that takes years to give you any return. You also need to consider your own risk tolerance. Some people are more comfortable in taking risks whereas others may be risk averse and don’t want to invest in uncertain projects or vehicles.
Consider the profitability
Some investments tend to seem profitable on the surface, but a deeper analysis reveals that the return on investment is actually insignificant. Why? This is because the expected return has to be adjusted for inflation and other factors and eventually what you are getting may not be worth it. It is a good idea to calculate the profitability index and compare it with other options before you make a decision about your money.
Be smart about building your portfolio
It is a given that there will always be business opportunities available. Therefore, it is not a good idea to commit all your finances to long-term projects. Always keep your liquidity at a favorable level because you don’t want your cash to be tied up in investments. Plus, you never know when a better opportunity might crop up so some money should always be held back. Moreover, it is smart to put your money in a combination of vehicles i.e. some that have a quick and regular payback and some that offer long term yet high returns.
There is no way to predict how a market will turn out so you have to have backup strategies in place. You need to diversify your investments to ensure your risk is mitigated as much as possible. Even then, have some exit strategies prepared to ensure that you can minimize your losses and get out when you want to without much hassle.
As long as you consider these factors, you will be able to make smart investment decisions in the future.