Wouldn’t life be easier if we all could apply a point-and-shoot method to investing?
In other words, we point at the assets we want to buy, they make us rich, end of story?
Unfortunately, that’s not how the world works; things like earnings per share, debt-equity, and market projections are some of the uncomfortable little metrics that must influence our investment decisions if we hope to make money.
While different asset classes come with varying considerations, the fundamental methodology for investing is usually the same. Here is a speed rundown of the general things to consider before making investment decisions.
1. Investment Objectives: Whether the investment decisions you want to make are tied to buying or selling, you need to clearly identify what your objectives are first. That is, what exactly are your long term and short term goals? Are they solely to ensure rapid growth of money, caring little for risk-aversion? Or are you concerned about the preservation of your capital and making sure it doesn’t lose value?
2. The Market: Gurus and investors across the world, agree that you should never invest in anything you don’t understand. The market or your understanding of it is a key factor in making investment decisions because, first, your asset(s) cannot be independent of market forces. Secondly, if you understand and can make estimated predictions, you can save yourself from loss and maximize profits. It is important to note that you don’t need expert-level knowledge of the market; you only need to know enough to inform your decisions.
3. The Basics
How does the market work: Learn what elements make up the market and what forces drive it.
Getting in and out: Learn what is required for investors to get into the market. For example, investing in gold bullion may prove difficult for the novice investor— considering the price of a gram. However, a novice investor can still get in on the gold market by investing in a bullion ETF or other gold options.
4. Projections and policy
Market projections: Where is the market headed? What do the charts say?
Government policies and international trade relations: Is the government about to slash interest rates again? Are there any trade wars or embargos that affect the market? These are things you must keep tabs on.
Market liquidity: How easy is it to sell off assets for cash?
5. The Company
If you plan to buy individual stocks from one or more companies or invest in corporate bonds, you’ll need to know everything you can about the company.
The CEO: Who is he/she? How experienced are they? What other companies have they managed? How successful were those companies?
Management style: Find out if the current management style is effective. Do they foster communication and teamwork? How do they treat their employees?
Track record: Check how much growth the company has experienced under the current management and compare it to previous management.
6. Company Financials
How strong are the company’s fundamentals? Has the company been making profits? If the company’s profitability has consistently increased over extended periods of time, then that’s a good sign. If the company consistently pays dividends to its stockholders, that’s a good sign as well because it means they are relatively stable. Interestingly, research has it that dividend-paying stocks make more money in the long run than non-dividend-paying stocks. Also, be sure to check relevant ratios within the company’s industry to assess comparative performance.
Market relevance: Does the company have sway in its industry? Will demand for its products/services increase with time?
8. Risk Tolerance
A rule of thumb for investing is to never invest what you can’t afford to lose. Your tolerance to risk informs your investment strategy. Investors willing to take on more risk can invest in high-risk, high-reward assets. Investors with a lower tolerance for risk may want to balance risk and reward by strategically allocating assets.
While there are many other things to consider before making an investment decision, these few points will give you a holistic view of what it is you are really getting yourself involved with. Where you believe you don’t know enough to make the best investment decisions, a little professional help will not hurt.