Finance Globe

U.S. financial and economic topics from several finance writers.
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How to Choose the Right Investments

How to Choose the Right Investments

It’s one thing to come to the conclusion that you need to invest your money with the idea of growth in mind. It’s another thing entirely to choose the right investments and make sound decisions as the days (and years) go by.

With so many types of investments to consider, it’s never easy to make sense of what you should and should not be doing.

Even if you decide on one type of investment, such as stocks, you still have thousands of options to compare. 

Fortunately, there are steps you can take to ensure that you choose the investments that best suit your investing style, financial situation, and future goals. Here are five things you need to do:

1. Understand Your Goals

How can you invest for the future if you don’t know what you’re trying to accomplish?

By setting both short and long term goals, it’s easier to decide which investments make sense and which ones you should never consider.

For example, if you’re saving for retirement, an IRA or employer sponsored plan makes the most sense.

However, if you’ll need access to the money before you reach retirement age, tying it up in a retirement account is a bad idea.

2. Create a Diversified Investment Strategy

There is more to investing than meets the eye. If you want to achieve great success, implement a strategy that you’re comfortable following on your path to reaching your goals.

For example, you may decide to start with low risk investments such as certificates of deposit. Over time, as you catch on and begin to better understand your goals, you can move into investments that have higher volatility.

In terms of diversification, you never want to put all your eggs in one basket. For example, many people have early success with stock investing, which prompts them to throw all their money into the market.

Unfortunately, if something goes wrong, such as the market taking a hit, all of their gains are quickly wiped out.

Don’t just create an investment strategy. Instead, make sure you create a diversified investment strategy.

3. Think Outside the Box

It’s easy to believe that you only have access to a few investment opportunities, but nothing could be further from the truth.

You may be surprised at what you find when you think outside the box. For instance, investing in your retirement account may sound like the safest way to reach your goals. And while this is a great place to start, it’s not the only idea to consider.

Thinking outside the box can mean many things. Maybe you want to invest in real estate, such as rental properties. Or maybe you have the opportunity to buy into a business venture.

As long as you’re comfortable with the investment, as long as you know the potential risks and rewards, you should feel comfortable thinking outside the box and taking action when appropriate.

4. Know Which Investments to Avoid

It goes without saying that some investments are safer than others. For example, there’s not much risk associated with putting your money in a high yield savings account.

Conversely, there is more risk associated with investing in the stock market. Taking this one step further, investing in penny stocks is just about as risky as it gets.

There is nothing wrong with taking a risk, but this must be in line with your overall strategy.

If you get involved with a high risk investment without knowing what you’re doing, it could negatively affect your future in many ways.

Overall, you must know which investments to avoid. This way, you never get caught up in something that doesn’t suit your style.

5. Review, Review, Review

There is no such thing as a “set it and forget it” investment. Even if your money is tied up in “safe” investments, such as CDs, you should still review your progress on a regular basis.

As you review your investments, you may find that changes are in store. For example, the way you invest in a retirement account needs to change as you age. As you get closer to retirement age, you don’t want to take on as much risk. Instead, you should move your money into safer investments.

If you neglect to review your strategy on a regular schedule, it’s possible that something important could slip through the cracks.

Conclusion

Since no two people are the same, there is no guaranteed formulate for choosing the right investments.

If you want to put yourself in better position to succeed, follow the five tips above. This advice will help you make more informed investment decisions.

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Comments 2

Finance Globe on Thursday, 23 March 2017 00:18

Great article Chris. One thing that I would like to note. If you are scared about an investment, then this is a wonderful sign that you have too much of your savings in a high risk area. Risk management is not being applied correctly.

Allocation should come to mind here. For example, anybody with a large amount 100% invested in stocks (gold, homes, etc) should indeed be nervous. As you mentioned, diversify. If you are close to - or in retirement, then less risk would likely be better suited.

Great article Chris. One thing that I would like to note. If you are scared about an investment, then this is a wonderful sign that you have too much of your savings in a high risk area. Risk management is not being applied correctly. Allocation should come to mind here. For example, anybody with a large amount 100% invested in stocks (gold, homes, etc) should indeed be nervous. As you mentioned, diversify. If you are close to - or in retirement, then less risk would likely be better suited.
Frank on Friday, 30 June 2017 15:04

I would also add time of investment is very important. If you investment is 30+ years, you can consider riskier investments.

I would also add time of investment is very important. If you investment is 30+ years, you can consider riskier investments.
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Monday, 14 October 2019

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