Whether you’re investing in stock, real estate, or any other asset, there are strict standards you must follow to achieve your financial goals. It’s not about getting lucky or being in the right place at the right time. These things can happen (and help!), but your investment success depends far more on following the right roadmap.
Here are seven essential considerations before you make an investment.
How Are My Finances Looking?
Your current financial state will determine not only what is a feasible investment but what is responsible. You’ve got to know your finances inside and out. Take a good, long look at your budget. Calculate how much you have available to feasibly invest while also maintaining a safety net.
No matter how good an investment seems, you never want to overleverage or risk your financial stability. Remember, no investment is a sure thing! You should never invest more than you’re willing to lose.
What Is My Risk Tolerance Level?
Though no investment is a sure thing, some are less sure than others. How much are you willing to risk? If you know you’d be uncomfortable committing your money to riskier endeavors – if it would keep you up at night and consume your thoughts – think twice. You want your investments to be a source of hope and pride, not anxiety.
No one can tell you how much risk is appropriate! You must determine your threshold for yourself.
What Are My Financial Goals?
What do you want out of your investments? Part of selecting the right investments wisely is understanding what you want them to do for you. “Building wealth,” can look very different depending on who you ask. Do you want to earn passive income? See regular dividends? Hold physical assets? Would you like to fund your retirement, secure a child’s college education, or live a life of financial freedom?
Knowing how much you want to earn from your investments and how quickly you want to achieve those goals determines which investments are a good fit for you.
What Options Do I Have for Diversification?
No matter what you invest in, diversification is a core tenant of success. It doesn’t matter if it’s stock, real estate, or any other asset. Assess how you can diversify your portfolio within those assets and how quickly and easily you can acquire them. Are you able to leverage financing? Are there different levels of financial commitment you can take advantage of? Know what your diversification options are, but how often and to what degree you want to diversify to fit short and long-term goals.
What Is the History Here?
Finally, look at the history of your potential investment’s performance. Are returns reliable? How frequent are extra expenses, downturns, and rough patches? The long-term performance helps you determine both risk and trustworthiness. This isn’t to say you’ll find a foolproof investment, but you can get an idea of how an investment will handle a variety of circumstances. Assess performance throughout trying economic periods such as the Great Recession and COVID-19 pandemic.
It's one thing to know an investment will perform well in the good times but a whole other thing to know it stands up against challenging circumstances.
Who Will Help Me Stay On Top of the Details?
Who you choose to partner with makes all the difference in the world. Whether you’re looking into a financial partner, a management company, company stock, or any other advisor, facilitator, or opportunity, beware of this essential truth: there are those who will defraud you and try to cheat the system. Not all investments are reputable ones, not all companies are ethical and trustworthy.
Before you invest, do your homework. Check BBB feedback and ratings. Request documentation and reports on performance and financials. Ask the tough questions. Talk with fellow investors.
Your due diligence is essential.
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