6 Things to Consider Before You Make an Investment

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Making an investment is one of the more serious and careful decisions you could ever do; primarily because of the risk of losing your hard-earned money if not done wisely. Business opportunities surely come to you in many ways and forms, and the prospect of earning at least a good return on your investment (ROI) will tempt you to write that check or swipe that credit card.

It’s important that before you shell out funds for what you think is an economically viable investment, you need to contemplate on these concepts:

Purpose of Investment

Think about why you want to invest. Is it for your short-term needs or immediate income generation? Or is it for gradual and small incremental build-up of your financial portfolio? The choices of your investment channels depend primarily on your short-term and long-term financial goals.

Nature of Investment

Investment choice may be between passive investment or active investment. According to Investopedia.com, passive investment is when the investor simply entrusts funds to another person, group of persons or a legal entity without taking part in the management of the funds. Active investment, on the other hand, is when the investor takes an active role in the decisions on how the investment is used or managed.

Term of Investment

Investment may be for short term, or long term. It is always necessary to determine the time commitment required of your investment. Funds that may be needed soon could not be committed to long term investment with the hope you may withdraw it soon even when there are periodic review of investment.

Profit-Risk Factor

When considering investment options, one must have a rough measure or estimate of the relative risk and profit potential of the investment. Normally, the higher the profit, the higher risk borne. It is not, however, always the case. Much depends on the nature of the investment vehicle or the business entity one is investing into. There are businesses that have very high potential return, but also very high risk as in case of mining and oil exploration.

Businesses that have a proven track record with stability over long period of time have lower risk. It is important then for one to know much about the industry or the business entity one is investing into, especially the financial data and historical performance.

Exit Plan or Withdrawal Option

A very wise consideration which is seldom considered by investors is the escape plan for possible worst case scenarios. In terms of stock investments, this is done by establishing a downward trend indicators and setting a benchmark for automatic sell order. In the case of a business, monitoring similar benchmarks as to performance trend of a business should be established or determined as part of investment evaluation.

It is imperative before committing to an investment that you understand the restrictions on exiting the investment. All best practices dictate that on entering an investment you should have a sell price, both loss stopping and profit taking.

Investor Involvement

Finally, the higher the investment amount involved, the greater the need to be more involved and constantly monitor at least the progress of the business. Therefore, before investing, see first if you will have direct access and involvement in how your money works for you. This is determined by your decision to actively manage your portfolio or have someone else do this for you (passive).

More factors come into play, but your inner sense or intuitive financial quotient can also be a guide. Provided that you won’t be too taken up emotionally by the prospect of lucrative returns, you may be more wide open and perceptive of the wider investment options to diversify your financial portfolio.

And just remember the old saying, “Don’t put your eggs in one basket.”

Photo Credit: momanddadmoney.com