Things to consider before making an investment decision

Investment decisions

by Eleanor Weaver |

If you have some spare cash in your retirement and want to try to boost your finances, you might want to consider making an investment. The money you make from it you can put towards your holiday of a lifetime, use to make those costly upgrades to your home or share with your loved ones to help kick-start their journey to financial freedom.

However, before getting started, it’s important to know how you can make the right decisions to avoid any financial risks.

A 2014 research study that was conducted to identify the factors influencing individual investment decisions showed the most important factors to be:

• The chosen business’ position and performance

• The potential for investment returns and economic conditions

• Your thoughts on the investment opportunity based on third-party opinion

• The goodwill of the business as well as their accounting information

• Your own perception towards the company

• Environmental factors

• The importance of risk minimisation

If making an investment is something you could be interested in, here are some things you need to consider before getting started.

Make a Personal Financial Roadmap

The first step to making any investment decision is to draw a personal financial roadmap. You need to make sure to look at your current financial situation, your investment options, the desired return you hope to achieve and how long you intend to invest for. If you think investing into shares is an option for you, you should know the most important things about them which Learnbonds can explain in their beginner’s guide.

Knowing your goals and risk tolerance to the investment opportunity will help you understand better how much time and money you are willing to invest, as well as help you avoid accidentally jumping into high-risk investment options. Having a concrete long-term plan in place will ensure you use your money wisely, improve your financial security over time and make the most of your investment.

Personal financial roadmap

Weigh up the Risk vs Reward

Investments naturally come with risks, regardless of what you opt for. To avoid getting more losses than gains, you need to make sure you have an idea of the degree of risk that a certain investment option has. A good way to see if your investment is within your ‘risk appetite’ is to look at the progress report of the investment over the years. Although this won’t guarantee its future, it will give you an idea of the risk-reward ratio to expect.

To calculate the ratio, divide the amount you could lose (if the price takes a different turn) by the amount you could gain if the investment works as expected.

Know your Risk Appetite

Knowing your risk appetite could help you determine the investment options best for you. What works for other people might not necessarily work for you so you need to measure your appetite for risk based on your own circumstances. As you invest, there is the risk you could lose your principal, which is the amount you’ve invested, so it’s important to know if the risk is worth the reward. To help determine your risk appetite, use the risk-reward ratio to estimate the outcome and apply your personal financial roadmap to determine how long you intent to invest for. If you are able to invest for the long-term, you might want to try an investment with higher risk (like stocks or bonds) that get better returns over time.

Consider an Appropriate Mix of Investments

As with any decision, it’s often advised not to put all your eggs in one basket! The same applies to your investments. You can help prevent making significant losses by varying your investments as the returns differ under different market conditions. For example, if you invest in stock and bonds you won’t have to worry about both failing and rising at the same time so your risk of losing money is reduced by diversifying your options.

These tips are important when considering an investment in your retirement to ensure you make the right decision that can benefit you and your loved ones in the long run. While it’s a great starting point to know if investing is right for you, you might also need to seek out the advice of a financial adviser to help ensure you do what’s right for your financial security.

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