Have you ever had a friend suggest a sure fire investment? If you think back, you may recall thinking they were a bit delusional and that the investment was risky at best or a complete non-starter at worst.
The reality is many people have a hard time determining what a good investment is and how to evaluate investment risk and return. This is where financial advisors can come in as resources to help you determine if the reward is worth the risk.
Generally, with any type of investment, there are several factors to consider. These include:
- Long term stability – When the asset, property, company or fund has a history of long-term stability and value, it may be a very good investment. However, past performance is not an accurate predictor of future value in many industries. You have to not only look at the value and stability in the past, but how relevant the asset will be in the future.
- Can you afford it? – Even the best investment is not a good risk if you cannot afford the buy-in. For example, if you have to take out a loan or liquidate your other assets, you have just tied yourself financially to that one investment. Putting all your eggs in one basket is never recommended, especially in today’s economy.
- What is the risk? – The risk is not tied into whether or not you can afford to lose all the money today, but can you afford to not have that money in some other investment? In other words, if all your retirement is tied up in one investment, it isn’t available for emergencies, for other investments, or even for paying off expenses.
- What do you know about the investment? – Many people get emotionally involved in decision making around investments. This may happen because you trust the person making the investment recommendation or perhaps you simply got caught up on the marketing and advertising. Stepping back and completing independent research on the company, stock, fund or other investment is always a wise decision.
Your financial planner can help you avoid jumping into risky investments, and help you to determine a long-term, balanced strategy for growing your personal wealth.