A good investment fits your financial goals and risk tolerance and makes money. What you can do with what you have, your comfort with risks and what works for you are all investments. One person’s good investment may be another person’s bad investment.
Learn more about identifying your financial goals and deciding which types of investments will best position you to achieve them.
Regardless of the types of investments, they all exist for one reason: to make money. A good investment can accomplish this while fitting into your risk tolerance and overall financial plan. To find a good investment, you must first identify your goals, set an investment budget and work to identify assets that have the potential to grow.
The investment can often be worthwhile because of its ability to balance other investments in your portfolio. For example, suppose you invest almost exclusively in US-based companies. While these stocks can be good performers for you, they can also expose you to bad outcomes if the US economy takes a dive. You can diversify your portfolio by investing in different industries and sectors, investing in foreign companies or investing in different types of assets.
Ultimately, you should evaluate investments with one thing in mind: increasing your net worth and helping you achieve financial security. Investing comes with risk, and it’s possible to decide whether you’ve found a good investment (or not) by considering all those factors.
Remember that successful businesses often make successful investments, so you may benefit from learning how to examine a company’s business plan and financials. It is also important to understand the dynamics and economics of supply and demand and to consider the total cost of ownership with any investment.
How good investments work
There is no way to know whether an investment will increase or decrease in value, as risk is part of the investment game. Many indicators can give you a good sense of whether something will become more valuable over time. The market continues to be thoroughly analyzed by professionals, providing many insights into the performance of various instruments. Here are some characteristics you should look for in a company before investing:
- Consistent revenue and revenue growth
- competitive advantage
- Manageable debt
- At a reasonable price
They grow under different economic conditions
If a company has increased sales over its lifetime, it is reasonable to assume that its stock is likely to increase in value over time, all else being equal. When considering revenue and growth, consider the economic circumstances surrounding performance. A solid performer in periods of economic expansion may not be as solid in periods of contraction. A holistic view of operations is beneficial when considering growth.
There is something distinct about them
You also want to ensure that the company has a competitive advantage; There must be something about its products or processes that can withstand the pressures of other businesses and volatile markets.
They have a manageable debt level
New investors often overlook a company’s debt, but it’s important to check. Debt in itself is not necessarily bad, but depending on the company and its financial model, a high level of debt can be a red flag. Too much debt can be a burden on a company’s ability to grow and can indicate some broader financial problems. In some cases, it can also indicate a failed company. The debt-to-equity ratio provides some insight into a company’s financial structure.
They can generate income
If steady, passive income is one of your goals, certain investments will suit you better. For example, real estate can be a great investment if you own a property and rent it out to tenants for monthly payments to cover their monthly expenses. In some cases, stocks can be income producers if companies pay dividends. However, if you’re looking for steady income, investing only in growth stocks that don’t pay dividends may not fit your financial goals well.
The price is right
You should also look out for overpriced investments – signs of investor exuberance or price manipulation. The primary purpose of investing is to make money, so paying too much for an investment reduces your potential profits and returns.
With undervalued assets, other investors are selling them or don’t want to buy them; Those companies may be very new or close to failure. It is normal to see the price of an investment move up or down, but wider than average swings and overtrading in either direction is a sign that something is wrong.
What it means for individual investors
In short, determining whether an investment is a good one requires establishing goals and creating a strategy to help you reach those goals. That means you’ll need to research stocks or bonds, examine fund management and performance, or analyze annual and quarterly financial statements.
If it all seems a little overwhelming, or if you don’t have the time, like many people do, choosing a fund that matches the performance of an index like the Standard & Poor’s 500 can make it easier to get your feet wet. Index funds are passively managed and typically, match stocks listed on highly analyzed and vetted indexes.
There’s also nothing wrong with talking to a financial planner or advisor to help you get started. If you choose that route, be sure to find a reputable person who listens to your goals rather than immediately recommending a product designed by the firm they work for.
Balance does not provide tax, investment or financial services and advice. The information is presented without regard to the investment objectives, risk tolerance or financial circumstances of any particular investor and may not be appropriate for all investors. Past performance is not indicative of future results. Investment involves risk, including possible loss of capital.