Investment Decisions
Every savvy investor knows that making a well-reasoned investment decision is key to success in the stock market. Investment decisions are the process of choosing an investment approach and researching potential investments in order to make money from potential appreciation or income over a certain period of time.
The considerations involved in formulating an investment decision require the investor to evaluate the various risks associated with the investment he or she is interested in and the potential rewards that can be reaped. In this comprehensive guide, we will discuss everything you need to know about how to make investment decisions.
The Basics of Making Investment Decisions
The first step to making an informed investment decision is to decide your financial goals and the timeline for achieving them. What are your near-term and long-term financial goals? Are you saving for a down payment on a house, or retirement? Do you need the money in the near future or will it be something that you can slowly save up and reap the returns later?
Once you’ve decided your financial goals, the next thing to do is to evaluate your risk tolerance. When making investment decisions, one must consider his or her risk tolerance–the amount of volatility you can handle without panicking and selling the investment.
Consider whether you are more comfortable taking on more risk with a chance of greater reward, or whether you feel better sticking with more conservative investments with a steadier rate of return.
Understanding Your Needs
Before investing, it is important to understand your needs and resources. In this step, an investor should assess their financial situation to identify the amount of capital they can invest and the potential rate of return they should be looking for.
In addition, an investor should also take into account his or her knowledge about the investment markets and the particular asset class. Some investors may be comfortable investing in certain types of assets, or certain countries, or certain industries. Others may not be as comfortable and may need to do more research and education beforehand.
Tailoring an Investment Portfolio
Once the investor understands his or her own financial situation and investment requirements, he or she can tailor a portfolio of investments that meets those specific requirements.
When devising an investment portfolio, an investor should consider:
- Asset allocation – which asset classes to invest in and what percentage of the portfolio should be invested in each one
- Risk/return profile – balancing the risk and return of each asset class to create a diversified portfolio with an overall risk/return profile that is appropriate for the investor’s goals and risk tolerance
- Investment horizon – when you plan to exit the investment, and the time frame of your investment horizons
- Investment vehicles – the different types of investments one can invest in (ie stocks, bonds, mutual funds, exchange-traded funds, etc.)
Conducting Due Diligence on Investments
Once you have identified a potential investment, it is imperative to conduct due diligence in order to assess whether it is a sound investment or not. This should involve researching the company or asset to get an understanding of the potential risks and rewards associated with it. You should also evaluate the track record of the asset, including past performance and the outlook for the future of the underlying asset or company.
Investment Strategies
When making investment decisions, it is important to have a strategy in place. A sound investment strategy should involve:
- Long-term focus – taking a more conservative approach with your investments and holding them for the long-term
- Diversification – spreading your investments across different asset classes, regions, and industries
- Risk management – making sure not to put too much of your capital into one asset class or security
- Research & Analysis – taking the time to analyze and research the investments you are looking at and the fundamentals of the underlying asset in order to understand the underlying value of the investment
- Timing – being patient and being aware of any market cycles that might affect the performance of an investment
Making an informed investment decision is an important part of investing, and one that should not be taken lightly. Doing proper research and analysis of your potential investments, in addition to having a sound strategy in place, will help you make informed decisions that will hopefully lead to financial success.
