Making a safe investment is not an easy endeavor.
In fact, the idea of putting your hard earned money into something that isn’t a guarantee can make anyone anxious.
How to know you are making a safe investment
This is the reason why investments should be made in a methodological and diligent way.
The following 7 tips could help improve the odds of you making a sound and safe investment. They are based on my own experience and observations in the investment industry and financial markets.
7. Value growth at all times
As long as there is a way to make money, there is going to be a risk attached to it.
Before making a decision to invest, look at the strategy of the company, look at the management board running day-to-day operations, see the past performance.
And after you do this, does the team inspire trust? Do the long-term prospects of the company get you excited? Was the company able to deliver on its past promises?
If the answers discourage you, then walk away.
To help you further, I can recommend you a wonderful book of Jim Collins “From Good to Great“.
In his book, the author went to great lengths to interview executive teams of the highly performing companies that had a sustainable growth throughout decades and even centuries.
6. Measure the company value
Once you realise the company has a bright future, how do you make sure you get a good deal on the potential purchase?
Without this vital skill, it will be hard to find out which company has potential for growth.
If you understand this part, you can reduce the chances of investing in something too risky.
A company that generates or may produce more value is the kind of company you want to set your eyes on.
There are a number of things you can look at to determine value, like by multiplying the current share price of the company and the number of shares that are outstanding.
The value you get is referred to as the market capitalization, and this number could be used to see how valuable the company is.
5. Do your own research
There is a lot of free advice out there.
But at the end of the day, it is you to live with the consequences.
I would recommend you to take advantage of various sources of data, revise every financial formula, learn about the fallacies of different company valuation models before taking the presented data at a face value.
Make sure to watch the market sentiment, how other investors perceive the same company you are looking at and what the historical market response has been.
Even once you pick the rigt company to invest, consider various investing platforms. Our team at AlphaGamma has prepared an extensive overview of great investing tools and platforms available on the market.
When choosing a broker or a trading platform, research all the associated fees (including the hidden ones) and the quality of execution.
If you don’t like to be bothered by this, you will lose money.
So do your own research to make a safe investment.
4. Diversify your portfolio
It is wise to diversify so that you aren’t taking a risk with just one company.
To start with, you can diversify by industry, country, company size, and by investing into various asset classes: equities, bonds, real estate investment trusts (REITs), derivatives, commodities, among others.
While it might be tempting to invest in them all, I suggest doing so gradually, one safe investment at a time.
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Otherwise, it is going to be hard to keep up with every single investment, and you know that is an important step to make sure you sell when you need to.
If you are a budding investor, go ahead and spread out, but make sure you keep your investments manageable.
3. Don’t invest what you can’t afford to lose
It is important that you set up an investment budget, and make sure you invest the excess above the budget.
This leaves you with enough money for you to live comfortably.
No one is saying you shouldn’t take a risk, but just make sure your risks aren’t putting your home or your family’s well-being in danger.
The point of a budget is to make sure that even if you do take a loss, it does not affect your current lifestyle.
Ideally, if you have who have already made some profits, you may begin to take a big percentage of those winnings and reinvest them.
In this case, you aren’t using your own capital to take risks.
2. Don’t just (blindly) follow your gut
You would be surprised how many investors make a decision based off of their guts.
There is nothing wrong with trusting your own intuition, but you need to make sure you actually pay attention to the details.
Do the work every single time you are thinking of investing or selling.
As the author of “Black Swan”, Nassim Taleb says that intuition does not mix well with statistics. Hence, look at the hard data first before making any judgements.
Keep an eye on other companies selling the same product or services because sometimes their growth signals a growing industry.
1. Keep educating yourself
Being an investor is a skill. Just like any skill, you can improve it.
When you are making a decision to invest, document it. Start a trading journal. In there, mention all the criteria and reasons why you like this particular stock or asset to invest. After a while, make sure to re-read it.
From here on, it is a matter of time and practice until you master your investing skills!
I hope these points will help you make smart investing decisions and help you improve your chances of making a safe investment.
How did you like these tips? What others would you like to add and what other topics would you like me to cover? Leave your thoughts and questions in the comments below!