What Makes a Good Investment?
More than half of American families own publicly traded stock. Most have indirect ownership through a mutual fund, retirement plan or index fund, while others own shares directly. However they invest, these households understand that assets are key to financial freedom, especially in today’s economy.
As interest rates fall and inflation grows, savings schemes become increasingly inadequate and investing more appealing. In the coming months and years, more Americans will likely buy up stocks and look to diversify their portfolios. Their efforts could minimize personal risk, promote peace of mind and generate a wealthy return, but only if their investments are good ones. Otherwise, they could lose everything in one fell swoop.
So what makes a good investment? There are several characteristics that set it apart from the riskier, less rewarding ones.
Healthy Amount of Risk
Any investment, regardless of how good or bad it is, comes with some risk. For instance, market risks like political uncertainty, recession, and changing interest rates can impact overall performance. Meanwhile, liquidity risks can force you to sell an investment for less than it’s actually worth. Inflation risks can also pose problems by undermining investment and minimizing their returns.
That’s why the best investments come with a healthy, limited amount of risk. Diversifying your investments will also mitigate risk, regardless of where you put your money. Don’t put all your eggs in one basket.
In many cases, investments with high liquidity also prove highly profitable. The more liquid an asset, the easier it’ll be to sell whenever the time comes. The less liquid it is, the more difficult it’ll be to sell at full value, which can ultimately lower your expected return.
Examples of good investments often include stocks and bonds because they’re highly liquid. In other words, you can sell them at practically any given time. These kinds of investments are simpler and less risky for people who may need to withdraw earnings sporadically. Assets such as cars, real estate or timeshares have low liquidity because finding a willing buyer can be difficult, so they could prove to be poor investments.
If you’re unable to see yourself owning the same stock 10 years from now, perhaps you should wait and put your money elsewhere. Why? Company shares are long-term investments that provide a higher rate of return over time. The longer you hold onto your stock, the more time it has to increase in value — and survive a few nosedives.
You should also consider your own life circumstances and goals when making such long-term investments. For instance, if health problems or family issues force you to sell earlier, you could suffer a major loss. Allowing your wealth to compound is the best way to achieve financial freedom, so you must play the long game to win.
An investment outcome’s predictability can also affect its risk level and ultimately determine how good it is. Investors must understand the market and research company investment strategies to know how bright — or dark — its future might be. The best ones have predictable outcomes that suggest a high chance of success. The worst ones make empty promises or have declined in value for a number of years.
Of course, it’s impossible to predict with 100% certainty how well or badly an investment will perform. However, if you make decisions based on facts, data and hard evidence, you’ll have a higher chance of success, regardless of where you put your money.
Making the Best Investments
Just one in 10 investors actually makes money in stock markets. Whether it be a lack of patience, revenge trading, or uncontrollable factors like political climate, the other 90% suffer losses. You must understand the qualities of a good investment if you’re to make a good investment. That’s why it’s so important to educate yourself and make informed decisions. If you’re patient and manage to avoid costly mistakes, your investments will likely pay off.