What Is a Good Investment?
Regardless of the types of investments, they all exist for one reason: to make money. A good investment can accomplish this while also fitting into your risk tolerance and overall financial plan. To find a good investment, you should first identify your goals, determine an investing budget, and work to identify assets that have the potential to grow.
An investment can often be worthwhile because of its ability to balance out other investments in your portfolio. For example, suppose you are invested almost exclusively in U.S.-based companies. While these stocks may be good performers for you, they may also leave you exposed to bad results if the U.S. economy takes a dive. You can diversify your portfolio by mixing investments in varying industries and sectors, investing in foreign companies, or investing in various types of assets.
Ultimately, you should evaluate investments with one thing in mind: boosting your net worth and helping you achieve financial security. Investing comes with risk, and it is possible to gauge whether you have found a good investment (or not) by considering all the factors that influence them.
Portfolio diversity has been a staple in the investment community for a long time. It helps you mitigate the risks of losing all of your invested capital.
Remember that successful businesses often make for successful investments, so you may benefit from learning how to examine a company's business plan and finances. It's also important to understand the dynamics of supply and demand and the economy, and to take into account the total cost of ownership with any investment.
How Good Investments Work
There is no way to know whether an investment will rise or drop in value, as risk is part of the investing game. Many indicators can give you a good sense of whether something will become more valuable over time. The market continues to be thoroughly analyzed by professionals, providing many insights into different instruments' performance. Here are a few characteristics you should look for in a company before investing:
- Consistent revenue and earnings growth
- Competitive advantage
- Manageable debt
- Fairly priced
They Grow Throughout Various Economic Circumstances
If a company has boosted sales throughout its lifetime, it's reasonable to assume that its shares have the potential to increase in value over time, all else being equal. When considering revenue and growth, consider the economic circumstances surrounding the performance. A solid performer in a period of economic expansion may not be as solid in a period of shrinkage. A holistic view of performance is beneficial when considering growth.
There Is Something Distinct About Them
You also want to ensure that a company has a competitive advantage; there should be something about its products or processes that can allow it to withstand pressure from other businesses and volatile markets.
They Have Manageable Debt Levels
New investors often overlook a company's debt, but it's essential to examine. Debt by itself isn't necessarily bad, but a high level of debt can be a red flag, depending on the company and its financial model. Too much debt can be burdensome to a company's ability to grow and can indicate some broader financial problems. In some cases, it can even indicate a failing company. The debt-to-equity ratio provides some insights into a company's financial structure.
If you divide a company's total debt by its total equity and get a result of more than one, the company has more than $1 of debt for every $1 of shareholder equity.
They Can Produce Income
If steady, passive income is one of your goals, specific investments will suit you better. For example, real estate can be an excellent investment if you own a property and rent it out for monthly payments to tenants to help cover its monthly expenses. In some cases, stocks can be income producers if the companies pay out dividends. However, if you're looking for steady income, investing exclusively in growth stocks that don't pay dividends wouldn't fit well into your financial goals.
The Price Is Right
You should also strive to look out for over-priced investments—signs of investor exuberance or price manipulation. The primary purpose of investing is to make money, so overpaying for investments cuts into your potential profits and returns.
With under-priced assets, other investors are selling or don't want to buy them; those companies might be too new or close to failing. It's typical to see an investment's price go up or down, but wide swings and more trading than average in either direction are indications that something is wrong.
What It Means for Individual Investors
In a nutshell, determining whether an investment is a good one requires establishing goals and creating a strategy to help you reach those goals. It means you'll need to research the stock or bond, investigate the fund's management and performance, or analyze annual and quarterly financial statements.
If all this seems a bit much, or if you don't have the time, like many people, choosing a fund that attempts to match the performance of an index like the Standard & Poor's 500 can make it easier to get your feet wet. Index funds are passively managed and, in general, match the stocks listed on highly analyzed and scrutinized indexes.
There is also nothing wrong with talking to a financial planner or advisor to help you get started. If you choose that route, be sure to find a reputable one who listens to your goals instead of immediately recommending a product designed by the firm they work for.
- The first step to finding good investments is to identify your goals, risk tolerance level, and interests.
- A good investment fits your financial goals and risk tolerance and grows in value.
- Diversification is critical to maintaining a growing portfolio through various market cycles.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.