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How to Choose The Right Investment?

by Violet WillettNovember 3, 2021
How to Choose The Right Investment?

Choosing the right investment for you is a crucial decision that can impact your financial situation. While mastering the techniques and ways may take some time, learning the basics of investment is straightforward and relatively simple. You need first to understand the basic guidelines that can help you get started investing wisely.

We asked the experts to step in and guide us on how to choose the right investment. Here are their top tips for making sound financial decisions; 

You can use a stock market simulator to experiment with investing in stocks, bonds, commodities, and more. Other tools such as calculators and even apps can help you make the best financial decisions for your future. 

Here are some tips to consider when thinking about how to choose the right investments:

1. Current Financial Situation

The first step is to evaluate your current financial situation. You can use tools like a net worth calculator - even if you don't have much money, you can start saving little by little and see how it increases over time. It's important to have a goal in mind, which you will be able to refer back to at any time.

2. Risk Evaluation

Decide how much risk you are willing to take before choosing an investment. Using a risk assessment calculator will help calculate the amount of money you have available and recommend what type of investments would fit that profile best. 

For example, If you want to use your money on riskier investments, you should be aware of what is best for you and put in the work beforehand so that if something happens, at least you will have some savings.

3. Investment Plan

Have an investment plan in place before starting any investing. You can copy an existing plan or write your own. Your plan should include the types of investments you are interested in, your risk tolerance, time horizon, and goals. It may also help to write a budget that outlines how much you have to save each month or year for investing.

4. Learn From Others’ Experiences

You can use other people's experiences as a guide to what has worked for other people. By seeking out other people's experiences, you can see what others have done to take advantage of their money. 

5. Consider Waiting Period

You should think about how long you are willing to wait for your money to grow - stocks, bonds, mutual funds, and CDs all have different time frames, so choosing the right one will depend on your time horizon.

Kate Diaz, Co-owner & Writer Swanky Den 

6. Suitability

Investors need to consider the suitability of products they are investing in. What might be right for a young investor with a high net worth is not the best product for a retiree needing to rely on IRA's distributions for income. 

A volatile stock that has great earning potential may not be suitable for those protecting their nest egg, even though it may be suitable for the investor with higher risk tolerance. Products outside of the traditional stock market, such as real estate-backed investments, could seem secure on the surface but may carry a more considerable risk of complete loss and or not be appropriate for those that require more liquidity.

In order to ensure the suitability of an investment product, you want to research the investment, understand how it works and who is involved and what happens if it fails, then decide if that the opportunity is solid enough, based on your circumstances. 

For example, a confusing structured product is generally not suitable for an average investor without the experience to navigate it and fully comprehend the risk if market factors go against projections.

If you are using a financial advisor to help make investment choices, ensure that the broker has researched the financial product, understands it, and feels that it is appropriate for you, your risk tolerance, and your financial goals. This is part of a broker's fiduciary duty to their clients. Your financial advisor should look at investments in light of your needs before recommending them.

If your broker fails to research the product, offers a product to you that doesn't match your financial needs, or recommends an investment for which he receives an incentive without considering if it is right for you, it can be a red flag that misconduct has occurred.

David Meyer, principal at a leading securities fraud law firm InvestorClaims.com

7. Examine The Price-Earnings Ratio 

When determining the best investment opportunity, I recommend examining the price-earnings ratio since this can assist in determining market value. The P/E ratio is a valuation indicator that indicates how well a stock's price performs in comparison to its earnings. 

When fundamental research and value investing strategies are used, the P/E ratio is a critical indicator of whether a stock is under or over-valued. It provides information about a stock's market value or its value as determined by financial markets. Divide the company's share price by its earnings per share to obtain the P/E ratio.

Alan Harder, Mortgage Broker AlanHarder.ca

8. Look For Trends In Profits Growth

My best recommendation for identifying the right investment opportunity is to look for trends in profits growth. Examine a company's earnings growth trends. Observe earnings trends over time to determine if they are generally increasing. If this is the case, it is a fairly solid indication that the business is doing something correctly. Even a slight, consistent improvement over time can be a favorable indicator. 

However, profits growth and value must coexist for the stock to be worthwhile. Evaluating a firm requires an understanding of how it operates and the value of its future cash flows. This includes an assessment of the company's products/services, target market, and cost structure. 

This procedure enables one to ascertain a company's competitive advantages, market opportunity, and cash flow sustainability.

Jennifer Harder, CEO, and Founder of mortgage firm; Jennifer Harder Mortgage Brokers

9. Diversify Your Investments

Do not put all your eggs in one basket! Spread your investments out among different industries and geographic zones (think international). This way, if one investment isn't doing well, another should be and vice versa. 

Robin Brown, CEO at VIVIPINS

10. Choose The Correct Asset Classes

When selecting an investment, it is critical to choose the correct asset classes.

Asset allocation is the process of splitting your investment into multiple categories, each representing a percentage of the total.

To determine the optimal allocation strategy for you, you must first assess your risk tolerance. If temporary losses keep you up at night, focus on lower-risk investments such as bonds. If you're willing to endure failures in pursuit of ambitious long-term gain, invest in inequities.

Neither of them is an all-or-nothing proposition. Even the most conservative investor should incorporate a few blue-chip stocks or a stock index fund, confidence that the safe bonds would compensate for any losses. And even the bravest investor should consider adding some bonds to protect against a sharp decline.

Hutch Ashoo, Founder & CEO Pillar Wealth Management, LLC.

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