Investing is an effective way to build wealth but not all investments are good investments. There are a number of factors to consider when you want to make an investment. Understanding these factors, their importance, and how they can be achieved can set you on the road to knowing the right investment for you. Here are seven of these factors:
- Stages of Life:
Your age plays a vital role in determining which type of investment is right for you. There are investments you can make when you are young and there are investments you should not make when you are old.
Here is a practical analysis, a 25-year-old man can afford to take risks and engage in assets like stocks and forex trading because he has time on his side. If he fails today, he can always pull himself back up and make things right. But if you are an older man, particularly if you are near retirement, you must invest in safer zones like fixed income instruments, preferably sovereign bonds, these instruments are less likely to fail and they provide a steady source of income.
- The knowledge of the investment:
This is a key factor. A high percentage of people invest out of peer pressure and are unaware of exactly what their money is being used for, these people end up losing all their money. It is important to have deep knowledge of the type of investment you are engaging in.
For instance, if you decide to invest in stocks with any company, the number one thing you must know before you invest is that a share is just a piece of paper, the important thing is the company behind that particular share. You must understand exactly what the company does, you must understand the purpose of the investment and what the company uses the funds to do. If the company finds it difficult to explain these key points, do not invest with them.
- Risk Tolerance
There are ups and downs in investment, your risk tolerance will determine how you will respond in adversity. If you invest in a particular stock and the value starts depreciating, would you sell it or hold on to it? Are you stable enough to calmly review your situation objectively? Your answer to these questions shows if you are risk-averse or not. If you are interested in finding out for certain how risk-averse you are, log on to www.casafina.com.ng/questioniare, this will generate your risk profile and your risk preferences.
- Current Cash Flow
How much is your annual income? If your income is below your expenses then you cannot afford some types of investment. The most important part of being aware of your cash flow is that you must automate your savings every month consistently.
- Time-line of your investment
The time you align on your investment is key. There are investments that span for a period of one year, so if you have some money that you know you are not going to need anytime soon, you should invest it in fixed deposits with a reputable bank.
Devaluation is a major risk to the value of your asset. If you don’t factor in the power of devaluation in your investment and the purchasing power of your cash flow then you are going to lose a lot of money. You must understand that if you keep 10 million Naira in your account without touching it for 10 years, it will drastically depreciate in value. Hence, the reason why investing is good.
Inflation causes a relative loss in the purchasing power of the money you have. When making financial decisions ensure that you put into consideration the situation of the economy. It is best to always ensure that your returns are way above the inflation rate and the best way to achieve this is to engage in investments that will help you stay ahead of inflation. To find out more about which investment is right for you, reach out to an investment advisor.