5 ways to choose profitable investments
Not all investments are created equal, and choosing profitable investments can be daunting. Don’t know how to get started? Here are five tips to help you find the best options.
1- Determine your investing style
Investment strategies aren’t one-size-fits-all. Don’t get swept away by the anecdotal advice given to you by a loved one. The techniques that worked for your friends and family aren’t guaranteed to work for you! Get to know yourself before making new or first-time investments.
Take time to assess your financial situation. What’s your average or projected yearly income? How much outstanding debt do you have? How much capital do you really have on hand? The more aware you are of your financial standing, the more likely you are to choose investments that are a good fit.
Once you’ve got a clear picture of your situation, determine your ideal investing strategy. Are you more of a risk-taker, or do you like to do things slow and steady? The typical investment style falls into one of the following categories.
Conservative investing is the least risky. Conservative investors pad their portfolios with traditionally stable investments that are known for maintaining their value. Usually, the vast majority of a portfolio’s value is created through protected investments like bonds, with the remaining value coming from stocks and cash flow. The value of these investments rises steadily over time, usually on-pace with inflation. Because growth is slow and relatively minor, conservative investing is ideal for newer investors or those looking for a safe bet before retirement.
Moderate investing is slightly riskier than conservative investing. Like conservative portfolios, the majority of a moderate portfolio’s value comes from protected investments like bonds. Investors with moderate portfolios, however, tend to have more capital in stocks. As such, their investments’ value is more vulnerable to market fluctuations.
Aggressive investing is by far the riskiest. Nearly all of an aggressive portfolio’s value is at the mercy of stock market investments. If stock prices spike, so will the investment value. If stock prices crash, the investor may lose most (or all) of their investments. Aggressive investing is best suited to new and first-time investors who have the time (and money) for some trial and error.
2 – Do your research
Sure, this is obvious. The tricky part, though, is doing research the right way. Too many people underestimate the amount of research they should do and find themselves in an unfavorable situation. If you want to set yourself up for success, you’ve got to do your homework.
When you’ve selected a few investments you’d like to secure, find as much information as you can. Look up how their value has fluctuated in the past five, 10, and even 15 years. Does the value tend to increase or decrease? What do experts predict for the upcoming years? An investment that yielded great returns in the past isn’t guaranteed to yield them in the future.
If you’re buying stocks, do a deep dive into the financial history of the company in question. Read any and every official document you can get your hands on — all public companies are required to file detailed quarterly and yearly reports with the SEC. Take a glance at any available 8-K statements as well. These reports, which disclose leadership changes, acquisitions, bankruptcy filings, and similar unplanned events, may reveal additional (perhaps unsavory) information about company health.
3 – Diversify, diversify, diversify
Though it’s a cliche, the notion that you shouldn’t “put all your eggs in one basket” is sound investing advice. Unsurprisingly, investors with a variety of different holdings are most likely to experience profitable returns. Don’t go all in on one thing, no matter how confident you are in its value. When your money is spread across a variety of investment types, you’re protected if one of your investments goes sour. Diversified portfolios help shield your assets from the ever-changing economy.
4 – Cheaper isn’t always better
Countless investors have fallen under the spell of penny stocks, shares of small-cap companies that can be purchased for $5 or less. It’s certainly tempting to funnel in thousands of dollars in exchange for significant holdings. Why spend $15,000 for .00001% ownership in a major company, for instance, when you can use that capital to secure 5% ownership somewhere else? Penny stocks are a huge risk, and they’re rarely a good one.
Usually, companies that offer penny stocks are new and don’t have a long financial history. They haven’t yet met the revenue requirements for mandatory SEC filing and, in turn, are far less regulated. Consequently, it’s much harder to find accurate financial information. These companies don’t have the government’s eyes on the nitty-gritty details — why show them to you?
There’s little you can do to research penny stocks thoroughly. You might come across inaccurate information, or you might struggle to find information altogether. Unfortunately, many of these new businesses fail. If you’re buying blind, there’s a possibility you’ll lose most, if not all, of your investment. That’s not to say that all low-cap companies are headed for disaster. Will some become profitable? Yes. Are you getting in at the ground floor of the next Apple? Probably not.
5 – Find a trusted advisor
Choosing profitable investments can be tricky, but you don’t have to do it alone. A second set of eyes can give you some much-needed clarity and help steer you in the right direction. Don’t rely on just anyone — seek a third-party who will look at things objectively.
According to personal finance expert Lizeth Andrew, it’s best to find ask someone who has something to lose. “When seeking investment advice, make sure the advisor has a fiduciary obligation to act in your best interest,” notes Andrew.
Legally, an individual with a fiduciary obligation to you is anyone who has been entrusted to oversee your money and/or property holdings. Fiduciariesinclude attorneys, hedge fund managers, and designated trustees. Because these people are legally tied to you, they’ll give you high-quality, actionable information. Ask them any investing-related questions they may have — they’re required to give you good answers.