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Factors To Consider Before Making an Investment

One majorly acclaimed path to financial freedom is investing. However, before investing be it stocks or in real estate there are some factors to consider to ensure you achieve your financial goals. An investment choice usually depends on personal interests, financial goals, or needs.

Types of investments

The most common types of investments include

Stocks
Alternative and Complex Products
Insurance
Saving for Education
Mutual Funds and ETFs
Bank Products
Real estate
Annuities
Initial Coin Offerings and Cryptocurrencies
Bonds
Commodity Futures
Retirement
Security Futures

1. Risk

It’s not possible to mention risks while talking about a good investment. The different types of investments determine the risk levels of each type. It is important to understand that even if an investment aims to increase your finances, you could also lose money- all or some. This may be called the ‘risk’ You could lose your principal, which is the amount you’ve invested. It is therefore essential to evaluate the risk control level of investment before going ahead with it. You could lose your principal, which is the amount you’ve invested. This is because unforeseen circumstances may lead to losing money as we saw in the health sector last year. The higher the Return On Investment(ROI), the higher the potential risk and the type of investment too determines the risk degree.

No guts? No glory is a popular saying. The return on investment usually has the potential for a greater investment return. The type of investments you make should be dependent on how much time you need towards your financial goal. You can consider an investment in cash equivalents that possess a lesser risk for a short term investment goal or get a potential higher return in assets like stocks that are more volatile if you have a long-term financial goal.

Carefully analyze the risk factors and levels in an asset before investing.

2. Liquidity

An asset’s liquidity can be said to how quickly and easily it can be converted to cash. Money market assets can be easily accessed and used to buy almost anything therefore there are considered liquid assets. An investment should permanent a certain amount of the capital to be liquidated in cases of emergencies. Some examples of liquid assets include Cash (the ultimate liquid asset), Exchange-traded funds (ETFs), Treasury bills and treasury bonds, Bonds, Mutual funds, Certificates of deposit, Stocks, and others.

3. Rebalancing and Diversifying the portfolio

Diversifying

Financial consultants do not advise you to invest just one asset because it helps and protects you against uncertainties and market fluctuations. These are some ways to diversify – by investing in industry sectors, geographical markets, different companies, asset classes, and investment in different time frames. This is advisable because what is bad for some markets is good for others, you may not suffer significant losses if one investment goes bad as you would if you invest in the one asset class, as your other assets will pad out the losses.

Rebalancing

This simply ensures your portfolio is at a comfortable risk. By rebalancing, you’ll ensure that your portfolio does not overemphasize one or more asset categories. Rebalancing involves buying low and selling high, this may be difficult at first to invest in assets that are “losers”, but in the end, your potential return is greater when you sell them higher. This should be however done on an infrequent basis as advised by financial experts.

Other factors that must be considered before investing include:

Budget
Taxation/ Tax
Asset volatility
Period and Investment term
Research the market
Inflation rates.

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