It is crucial to evaluate all the potential investments and strategies before we finally make a decision as it is our hard-earned money at stake and we certainly do not want to lose it in the name of earning more out of it.
As Warren Buffet says, “Risk comes from not knowing what you are doing.” Therefore, it is important for us to know, i.e. be sure of what we are doing. It is crucial to evaluate all the potential investments and strategies before we finally make a decision as it is our hard-earned money at stake and we certainly do not want to lose it in the name of earning more out of it.
So, there are a few things that need to be evaluated before investing:
1. Personal Financial Goals:
Every investment should have a goal. The biggest evaluation is knowing what and when in terms of the results that you want from an investment. Hence, the investment strategy will depend on the outcome, i.e. an investor can bear volatility in the short term for a long-term goal given it is able to meet the objective.
Also, a backward calculation has to be done to calculate what is to be invested today or periodically to ensure the goal is met on the timeline decided. No one can go back 10 years back in time to invest the correct amount they should have invested; hence this activity is critical.
2. Risk-taking ability
The next most important thing is assessing your risk-taking ability, how much risk is your limit in investment at any point in time. It is really important to consider factors like age and current needs while deciding the amount of risk one is willing to take.
Those approaching retirements are seen to be investing in less risky assets such as Fixed Deposits or Bonds whereas those who are in their 30s or 40s are ready to invest in assets that are fairly risky such as stocks and indices. It is a very important evaluation as we should be comfortable with the amount of risk we take; it should not be the case that we invest in some risky asset and are thinking about it all the time and stressed about it. Investments should have a system and a strategy so that they become Passive in nature.
3. Current Mix of your Portfolio:
Asset allocation is another critical factor that most people overlook before making an investment decision. They often only focus on the asset class they have a personal bias or more understanding of and often over-invest in it. Result? As with any asset in an investment cycle, the total portfolio is deeply affected in a downturn.
One must recall all the investments they currently have in different assets and carefully check the percentage of each asset in it. Only then shall we be able to decide if we are in a position to increase/decrease the share of any particular asset in our portfolio.
4. Investment Research
Evaluation of the past performance of the asset is something that most everyone does. What they forget is that the past results are not an indicator of future returns as well. Without proper research into the future of the asset where the money is being parked, the capital is always at higher risk than desired.
Research Analysts are often the right people to consult for the same as they have the financial acumen to be able to closely understand the underlying risk and future returns of a financial instrument.
One very important thing is to take care of all the risks involved including the risk of fraud. There have been cases where investment decisions were not based on proper background checks of the company/bank/institution and the investor had to pay a huge price for that.
So, one must be very careful before investing. One such example was of F6 Finserve, a Delhi based broker who allegedly sold shares of clients without their permission when the entity was in financial distress. Many of their investors did not open an account in CDSL or NSDL to link their investments with the broker resulting in big losses.
by Arpit Arora, Passive Income Coach, AskTheWiseGuy