3 tips for making smart choices when picking investments
June 17 2020
Sam Becker
The markets are back near early 2020 highs after being devastated by the coronavirus pandemic in February and March. But trying to suss out a winning, or “good” investment is much more difficult than most people think — whether you’re trying buying gold, oil futures, or stocks.
Most people expect a return when investing their money. But investing always involves some level of risk — and experts say that if you’re planning on investing in a specific company, sector, or commodity, you need to do your due diligence. Otherwise, you could fall prey to “investing FOMO” and make a rash decision that loses you money.
“If you’re taking a lackadaisical approach to an investment,” says David M. McInnis, principal and co-founder of investment advisory firm East Paces Group in Atlanta, “I’ll tell [the investor] this: ‘Don’t make the investment.’”
As for how investors can make sure they’re doing their due diligence before making any kind of investment, experts say you start by making sure you have all of your financial bases covered, you know the risks, and that you’ve done your research.
Understand the risks and your tolerance for them
Again, all investments have risks. But McInnis says that some investments are inherently more risky than others, so before you decide to buy a stock or purchase another product that you may not fully understand, it’s important to do your homework: Research the investment thoroughly.
“Looking at your risk tolerance is important,” says McInnis. “Don’t take more risk than you’re comfortable with.”
Research potential investments
Researching investments, particularly stocks, isn’t easy. But if you want to try and get a rudimentary idea of a stock or fund, McInnis suggests you get comfortable diving into the data.
“Start at the top,” he says, by looking at how much money a company is making, how much it expects to make in the future, and consider how long the company has been around.
“Look at revenue growth metrics,” he says. “Really try to determine what the historical growth of a company’s revenue has been, and do what you can to figure out what it’ll be in the future.”
As for a company’s age, McInnis says newer stocks, like companies that have recently gone public, can be riskier. While many of those newbies generate headline-making returns, research shows that most investments in newly public companies lose money after five years.
“As a company gets older, bigger, and matures some, then costs come out of the equation and profit margins increase,” he says. McInnis adds that many trading platforms also publish research and analysis into specific stocks and sectors that users can access, often for free.
Take a step back and make sure that a stock or fund you’re interested in purchasing aligns with your values and strategy, Halverson says, and that you’re comfortable with the size of your investment. “Ask yourself how it fits into your overall investing strategy and philosophy.”
Finally, if you’re not confident that you fully grasp the nuances of a potential investment, both McInnis and Halverson say you should talk to a professional for advice. And McInnis says, “Go to a company’s annual filing” before making any financial decisions. “If you’re serious about investing, get their 10-K and read it.”
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