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Making investing decision requires critical evaluation and due diligence before committing one’s hard-earned financial resources into a project, venture, or an investment opportunity. This is necessary to avoid a disastrous financial outcome. Though, economic conditions including recession, war, inflation, pandemic etc may erode all or part of the entire original investment, but thorough due diligence and professional advice will guide a rational investor in evaluating the available courses of action before the final investment decision is taken. Professional advice will help investing individual or corporation to avoid market pitfalls during gyrations and manage the portfolio effectively to maximize return on investment.
At Adda, we set out below, key things to consider before making investing decision, including but not limited to:
This is the objective that the potential investor wants to achieve. The goal could be short-term or long-term in nature. Whatever might be the time horizon, it is important to have an investment goal upon which you want to build your investment portfolio. For example, the investment goal of a young adult may be to buy a car or own a house. On the flip side, the goal of a retiring or retired person may be to have a steady source of income to cater for other needs or to live a comfortable life after retirement. Therefore, it should be noted that the investment goals of individual investors are different and may include any of the following:
However, it is important that the specific investment goal should be consistent with the investment time horizon in making the investing decision.
The nature, characteristic and risk tolerance of individual investors are vital in making investing decision. Basically, there are risk averse and risk aggressive investors. The risk averse investors are those that do not like to take risk. They are very conservative in their investment efforts and hence, usually achieve lower return on investment. On the other hand, the risk aggressive investors are those with high risk appetite. This category of investors has vast knowledge of the market, and they normally earn a higher return on their investment consistent with the risk level, i.e., higher return for taking higher risk.
However, a rational investor must understand his / her risk tolerance before making any investing decision. The risk tolerance is the level or amount of risk that an individual investor is willing and ready to accept or undertake. Knowing this will help you to absorb whatever is the investment outcome, particularly, if it is not favorable.
The amount of the capital outlay available for investment will determine the size of the portfolio. Some categories of investment require a minimum amount while others a large capital outlay. However, the higher the amount, the better because this will enable the investor to spread the funds across several investment vehicles and diversify where necessary. Also, you need to determine the source of funding the investment. Is the funding going to come from personal saving, family and friends, or through borrowing? This must be ascertained before setting out for the journey of making investing decision.
Understanding the market forces of demand and supply is key to making good investing decision. The interaction of demand and supply determine the value of the investment. Therefore, your knowledge of the market is essential to have a good financial end. A rational investor should know when and how to buy or sell an investment. Your understanding of the market conditions will inform you what to do when your investment is undervalued or overvalued. It will also enable you to avoid or minimize any potential financial losses.
These are chances that the actual return on your investment may be different from what you anticipated. It may also means losing all or part of your initial investment. Therefore, before committing your limited scarce financial resources to any investing opportunity, you need to identify the potential risks and design a mitigating strategy to eliminate or minimize its occurrence. The investment risks may include any of the following:
Instead of committing your financial resources in one asset or security, consider spreading it across several investment opportunities, so that if one line of the investments is not doing well, at least, there will be others to fall back on. This means you should not put all your eggs in one basket. This is the essence of diversification. Diversification is a risk management technique that combines various investments within a portfolio. It is a strategy usually designed to reduce exposure to risk by combining several investments including shares or stocks, bonds, real estate etc which are unlikely to react to market condition in the same way and at the same time.
Hence, to avoid investment disastrous end, you should develop a diversification strategy to hedge against the risk of losing all or part of your investments, as well as not to over investing in a particular security.
To minimize your portfolio risk, you should consider investing in securities that are negatively correlated i.e., securities that move in opposite direction. You should also aim at geographical or international diversification by taking your investment outside of your current location.
To this end, diversification strategy can help in reducing risk for the purpose of making investing decision.
To make good investing decision, you need to be well informed about the market conditions and understand the nature of the investment before you commit your hard-earned financial resources. High consideration should also be given to the risk-return trade-off, which is the positive relationship that exist between the expected risk and return. This is because an investment with a higher risk will attract a higher return, whereas a lower risk investment will only command lower return. So, the choice will generally depend on your long-term financial goals and risk tolerance.
However, it is essential to ask questions from professionals before making any investing decision. This will help you to avoid catastrophic investment outcome and provide you with the right direction on your investment journey.
At Adda, our Advisory team will provide you with a unique and requisite support in making your smart investment decision.
At Adda, we pride ourselves with highly experienced and committed professionals willing and ready to collaborate with businesses to create value
info@addalli.com
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