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Tips and guidelines on making the best investment decisions.

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Investment simply means placing surplus money into shares, bonds, and other financial schemes that grow with time. channeling your funds into various investment options is far more beneficial than leaving idle funds in the bank.

Making the right investment contributes greatly to having happy retirement years. It is therefore important that you create a good investment portfolio.

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Before making an investment decision, consideration should be given to the risks, return, and duration.

In this article, we will be looking at guidelines that should be observed when you want to make an investment decision.

What is an Investment Decision?

This refers to a planned action that is concerned with the allocation of finance to certain opportunities to generate good returns on investment.

Investment can be classified into short and long-term investments. It is further grouped into capital expenditure, expansion, inventory, strategic investments, modernization of techniques, and replacement.

The focus of investment is to generate high returns after determining the risks involved, apportioning assets, and finally monitoring the performance of the investment.

Investment Options

  • Bonds

This is a debt instrument that is issued by the government or big corporations to generate funds from investors over some time.

  • Debentures

This is a financial security issue by businesses to obtain long-term finance without collateral.

  • Commodities

This includes investing in precious metals like gold, oil, animal products, and grain. Commodities can be a viable option when trying to reduce risk.

  • Derivatives

These are financial instruments whose value is obtained from instruments such as index trade and stocks.

The availability of leverage on derivatives makes the risk high but with a high return on investment.

  • Real estate

Real estate refers to land, buildings, and other tangible assets.

Process of Investment Decision

  • Evaluate your financial position

In financial management understanding your company or individual financial position will enable you to make the best decision investment.

  • Clearly state the investment objective

Investment can be either long-term or short-term and should be put into consideration by the investor when making a decision.

  • Allocation of asset

Investors are expected to allocate assets by their objectives into debentures, real estate, stocks, bonds, and commodities.

  • Choose investment products

After considering your investment options, you are to select an asset that best suits your financial needs.

  • Performance monitoring

As a portfolio manager, you are to closely monitor the performance of an investment and its returns. Appropriate measures must be taken when an investment starts performing poorly.

Factors That Affect Investment Decision

Some of the factors that affect the seamless process of decision-making are as follows:

  • Objective of investment

The reason for an investment is a determining factor in the length of fund allocation. This is the first step in the process of investment decisions.

  • Investment return

The priority of managers is to ensure positive investment returns. To achieve this feat, they engage in a profitable asset with limited funds available.

  • Return frequency

The number of times returns on investment are received is very important. financial management is all about making investment decisions from available options. The return on investment could be annual, quarterly, monthly or semi-annually.

  • The level of risk

The risk of an investment can be low, medium, or high. The level of risk acceptability differs between investors and companies. It is therefore important to carry out a risk analysis before committing funds to an investment option.

  • Tenure of investment

The decision to invest can be influenced by the time of maturity or payback period.

  • Tax benefit

Tax liability that is associated with assets is an important deciding factor. Investors tend to avoid high-tax investment opportunities.

  • Safety

This is an asset that is offered by a company that follows the regulatory framework with a clearly stated financial statement which is considered safe. Government assets are the most secure financial security instrument.

  • Volatility

Investment returns are most times affected by the fluctuations of the market and cannot be taken for granted.

  • Liquidity

Investors are most times worried about putting in emergency funds before the maturity of the investment.

The level of liquidity provided by an asset is a deciding factor for investors to either continue or withdraw from an investment.

  • Rate of inflation

Investors are always on the lookout for opportunities whose returns supersede their country’s inflation rate.

Steps to take before taking a decision

  1. Outline a financial roadmap

The first step in making an investment decision is to sit down and take an analysis of your financial situation.

Setting out your goals and level of risk tolerance with the help of a professional. As a result of no guarantee of investment returns, research has to be made to ensure the returns.

  1. Take an evaluation of your comfort zone

Every investment has some level of risk and it is important to understand the risk involved before purchasing securities like bonds, stocks, and mutual funds.

It is also important to know that some amount of money can be lost from an investment.

A reward for undertaking risks is the potentiality of a high return on investment.

If you have a long-term investment goal, investing in an asset with quite a high risk such as bonds and stocks will be a viable option.

On the other hand, if you are considering a short-term investment then it will be convenient to invest in a short-term investment such as a cash investment.

The major concern for persons who opt for short-term investment options is the rate of inflation in their home country.

  1. Including several investments in your portfolio

Lose on investment can be reduced drastically by including a variety of investment options in your portfolio.  According to research the three major investment options stocks, cash, and bonds do not plummet at the same time. This initiative will help to reduce the level of financial losses that can be incurred from an investment.

The conditions of the market that cause an investment to take a downturn in returns can likely be the reason for the poor or average return of another asset.

Investing in more than one asset category has the likelihood of reducing the level of loss that would be experienced when investments are in a single category.

Asset allocation is a very important deciding factor in meeting upset financial goals.

Including a good amount of risk in your investment portfolio will help you earn a great level of return.

For example, if you intend to save up for a college degree program, you may have to include either a stock or mutual fund in your investment portfolio.

  1. Apply caution when investing in an individual or employer stock

To lessen the risk of your investment, you must avoid investing largely on an individual or employer stock. This is to avoid the great loss that comes with putting all your dreams into a single venture.

By placing a considerable volume of investment within the same asset category the level of loss will be limited. Also, the fluctuation in investment returns will be greatly reduced.

Investing in individual or employer stocks can expose you to high-risk loss. There is the likelihood of losing your money if the company performs poorly or goes bankrupt.

  1. Maintain a reserve fund

Smart investors have some savings to cater for emergency periods such as the loss of their jobs.

Some ensure that they save up about six months of their monthly income to be well provided in difficult times.

  1. Keep a clean debt record

The wise action to take at any given economic period is to pay off all debts as quickly as possible.

  1. Taking advantage of sponsored employer plans

In most company-sponsored plans like retirement, a contributory system of payment is done between the employee and the company. When you do not meet your part of the contributory retirement plan, you are passing off a great opportunity. This is because the workplace plan is the easiest way of building a viable retirement plan.

  1. Timely rebalancing of your portfolio

This means bringing your investment portfolio to the actual allocation plan. By rebalancing, assets are placed orderly such that the risk involved is minimal.

Rebalancing can be done based on the calendar of your investment portfolio. According to financial experts, you are to reposition your investment portfolio every six to twelve months.

Conclusion

Developing a financial roadmap on investment options to undertake should be carefully done. You might require the help of a financial expert to ensure the reduction of risks on your investment.

Taking an analysis of your risk-bearing ability will help in making better investment decisions. Although a rule exists that the riskier an investment the higher the returns, caution should be applied before investing.

You must spread your investment across various categories of investment to reduce the level of risk.

FAQs

  1. What is the investment process?

The investment process includes analyzing your financial situation, setting up your investment objective, and asset allocation, choosing the right investment opportunity, and monitoring your investment.

  1. What factors affect investment decisions?

Factors such as investment objective, investment return, frequency of returns, risks involved, tax benefit, liquidity, rate of inflation, and maturity time should be considered.

  1. What are the investment options?

Investment options include bonds, debentures, stocks, commodities, and real estate.

 

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