Choosing an Investment Option: What to Look for

by bankman

The simplest answer is often the right one and this is also true for the features of a good investment option. When you are choosing an investment option you should be looking for an investment which returns more money than you originally invested, and which doesn’t require more of your time than you’re willing to invest.

This sounds very simple, but becomes decidedly more complex when you look at just how many different ways there are to increase your investment. Therefore, you should start your search for good investment opportunities by speaking to people who are well and truly entrenched in the industry – this includes brokers, friends who are investors, your financial planner or anyone with pertinent inside information to seek personal advice and a greater understanding of how investments work.

You may think you have to look for a long term investment, or one which is high risk, but a good investment is simply one which yields you more money than you started with. At the same time, you don’t always know how much your investment is worth because you don’t find this out until you sell it. Therefore, while there is always a risk involved because you never know when you will be liquidating your investment, and at what sort of profit, there are several criteria you can look for.

What to Look for in an Investment

1 – Secure initial capital

This is where the risk is involved, because if your initial capital is safe, and you come out of your investment with the original amount you invested, you’ve lost nothing but your time. However, if you lose your initial capital, then you have lost both your time, and your means to accumulate more passive income through investments.

Therefore, a good investment option will strike the balance between risk and reward, based on your financial situation, and the amount you are investing. If you are investing $100 you may opt for a riskier investment option than if you were investing $100,000 because you can afford to lose your initial capital in the first instance.

2 – Profit

Keeping in mind that inflation can be as much as 4% each year, for your investment to make a profit, it must be returning more than 4% annually. As a result, property investment can be a good choice if you are looking for a reliable property because values always increase over the long term.

While the property market fluctuates, there is usually no bad time to buy an investment property because prices are going to go up. The best property investment you can make is a swift one, so that your property can start accumulating capital growth and equity as soon as possible.

3 – Liquidity

Where property investment offers you strong profits for the future, if you want to get rich quickly from your investment, or easily liquidate it for cash or other investment options, you should look elsewhere because the time it takes you to sell your investment can eat into your profits.

However, when you invest in shares you can easily log into websites where you can buy and sell shares in a matter of minutes. Plus, the market for shares in large blue chip companies is strong and plentiful so there is little risk of being stuck with shares you don’t want or need.

4 – Benefits

While there are opportunities to make short term gains with some targeted buying and selling of investments, you’re often in it for the medium to long term. Therefore, you should also look for other benefits, besides the increase of your initial investment, to tide you over.

With property investment for example there are a myriad of tax benefits you can take advantage of because all of the expenses such as your loan interest, rates and maintenance are deductible on your tax, and you can also claim depreciation on items such as the hot water service of the property.

The costs associated with shares are also deductible, including the interest you pay on your margin loan if you have borrowed to invest. You can also reap tax benefits from franking credits, or imputation credits because the companies you are invested in have already paid tax on their profits, and so investors receive franking credits on their dividends. Your share dividends can be a way to supplement your income as many large companies pay their share holders monthly or quarterly dividends for each share.

There can also be significant benefit in having a diverse investment portfolio, scattered across property, shares, bonds and cash, and even simply making sure your shares are invested in a wide range of companies. This ensures that if one of your investments suffers a loss or fails, your overall investment profitability and return won’t be affected. This is also quite easy to achieve because in many cases you can buy small share parcels of just $500 to diversify your investments.

5 – Cash flow

The level of cash flow you need to achieve from your investment will depend on your financial situation, and the amount you are investing. For example, if you are investing in property with the aim to benefit at tax time, you need to still remember that your investment loan repayments must be paid each month, before you receive the benefits back.

Therefore, make sure you carefully analyze your budget and projected returns, remembering you may not always be able to rely on investment income to maintain your cash flow.

6 – Legitimacy

One way above all that you can ensure you are making a good investment, which will secure you good returns with manageable risk is that you are investing in a legitimate venture. There are countless scams circulating which promise investors big returns on their initial outlay, but if you don’t do your research, you are putting that initial capital at a very big risk, for not reward.

A long established, yet still popular investment scam to watch out for is a Ponzi scheme, where the scammer collects funds from new investors as part of an investment syndicate, and instead use those new funds to appear to pay returns to existing investors, without every actually investing anything.

You can easily find information on legitimate investment options because information about shares for example is available on the news, the television, the newspaper and financial websites. As a result, you can maintain an accurate picture of the value of your investment. Plus, when companies are listed on the stock exchange, they are required to report regularly to their shareholders through announcements, where they share details of their full and half year financials, and anything else which could affect share prices such as acquisitions and divestments, while also responding to any queries regarding movements in their share price.

Alban is a personal finance at Savings Account Finder, a savings account comparison site in Australia.


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