This post was written by Lucas Parker.
Making a good investment opportunity can bring you a small fortune, while a bad one is something that could ruin you financially in no time unless you’re very careful. The problem with this notion lies in the fact that differentiating good investment opportunity from a bad one isn’t easy. Fortunately, with just six simple questions, you might come one step closer to understanding what makes an investment a good one.
1. Is there a window of opportunity?
Keep in mind that the very fact that something exists as an investment option it means that, at one point, someone was able to make money off it. Nonetheless, you also need to understand the fact that this most likely means that they’ve managed to make this investment at the right time. This also means that they’ve managed to squeeze through the window of opportunity.
2. Is the window of opportunity still open?
So, the first question that you need to ask yourself is whether this opportunity window is still open and, if not, when will it open next time. For instance, while last year was amazing when it comes to cryptocurrencies (particularly Bitcoin) the chance that this trend will repeat itself this year, as well, is not that great.
3. When and why will I sell?
One of the things that you won’t hear that often is the fact that once you invest, you’re immobilizing your funds and assets for a prolonged period of time. For instance, some investments take years to bear fruit, which means that you need to ask yourself whether you can live without them for that long. Aside from this, you need to set a sell order ahead of time and make a rule to sell a stock when it reaches a certain (high or low) value. All in all, this is something that should probably be predetermined in order to avoid having to deal with this issue later on.
4. Can this investment diversify your portfolio?
Once you have this out of your way, you need to ask yourself a question of whether this particular investment helps diversify your portfolio. Namely, putting all your money in a single investment option is great if the investment turns out to be lucrative. Nonetheless, no matter how solid an investment may seem at the time, the fact is that no one can guarantee you a success. Therefore, you might want to look for something that can diversify your portfolio.
Traditionally, this is achieved by keeping a part of your investment money in stocks and currencies, while using the rest to buy commodities and similar assets. Traditionally, keeping assets in gold or silver is a common choice, yet, going with something a tad more uncommon, like considering argyle diamonds as an investment might also be a good idea.
5. What are the potential gains?
This particular question represents the duality between the potential gains and the risk assessment. Namely, the more volatile the investment, the greater the potential ROI. Nonetheless, this also means that the risk of losing money on the investment also increases. For instance, if you were to invest in cryptocurrencies, finding an aspiring ICO would, potentially, promise you an amazing ROI. Sure, this ICO might make it or it may fail completely, which is why you should never invest more money than you’re willing to lose. This is also the course of action when investing in any small business or startup. This leads us to our final question…
6. What happens if the investment goes to zero?
Previously we’ve mentioned that you should never invest more than you’re willing to lose and this is an advice that you’re most likely to receive regardless of the field that you are in. On the other hand, this is not always the case and there are some that allow the greed to get the better of them. This makes them overcommit to an investment that seems lucrative at the moment.
In the end, nonetheless, the trend of growth must come to an end and if this investment loses too much on value, one might find themselves in a horrible situation. In order to keep yourself away from this gamble-like experience, prior to investing, you need to ask yourself: “What happens to my finances if the investment goes to zero?” By giving an honest answer to this question, you can save yourself from a world of trouble.
One major mistake that a lot of investors make is looking for a perfect or risk-free investment. This is of course completely impossible. Even if you were to deposit all your money into the savings account, there’s no guarantee that the inflation wouldn’t chip it over the course of time or that the currency wouldn’t devalue itself on its own. All that you can do is do your research, trust in your own intuition and diversify your portfolio as a safeguard.