Gain Perspective on Financial Planning. Investments. Your Future.

How to Make a Good Investment Decision

Good investmentSince one person’s good investment choice may be a huge mistake for someone else, what factors should you consider when deciding upon a potential investment?

In investing, the only hard and fast rule is that past performance never guarantees future returns. Though you should try to understand why a security acted in a specific way in the past, the most important thing you can do is make sound decisions based upon your personal situation. To help you make an even clearer decision, use an investment evaluation tool.

All too often, folks lose money as a result of not asking the right questions. So, when deciding what to invest in, ask yourself:

What is your net worth?

Why is knowing your net worth important? Before you invest your money, you need to know how much you really have. This doesn’t only refer to savings, but also to other assets such as real estate and collectibles (if you would ever consider selling them). Knowing your total net worth helps you create an asset allocation model and understand how the new idea would fit in your big picture.

What is your tolerance for risk?

Risk tolerance is very individual. If you are close to retirement, your risk tolerance level may be lower than that of a younger person because you have less time to recoup any potential loss. Sometimes even younger folks don’t have the stomach for market volatility and they need to choose more conservative investments, too.

What is the purpose of the investment?

Are you investing for growth, to maintain your principal, or to generate income? Growth investments increase your wealth through long- or short-term appreciation. These investments include mutual funds and various types of stocks. Income investments, on the other hand, generate steady income through interest or dividend payments. Examples include dividend stocks or bonds. An income investment may not be suitable for growth investing, and vice versa.

To find out what other questions you should ask before making a financial decision, check out our free investment evaluation tool here.

 

Douglas Goldstein, CFP®, investment advisor, is the co-author with Grandmaster Susan Polgar of Rich As A King: How the Wisdom of Chess Can Make You a Grandmaster of Investing and director of Profile Investment Services, Ltd. which specializes in cross border investing and financial planning.

Profile Perspectives is a personal finance blog based on articles Doug Goldstein, CFP®, director of Profile Investment Services, Ltd., published in The Jerusalem Post. The information posted is purely informational and does not constitute investment or tax advice. Advertisements on the site are neither endorsements nor recommendations. Consult your professional advisors before making any investments based on articles or advertisements. Securities offered through Portfolio Resources Group, Inc., member of FINRA, SIPC, MSRB, FSI. Accounts carried by Pershing LLC., Member NYSE/SIPC, a subsidiary of The Bank of New York Mellon Corporation.

Privacy Policy | Disclaimer