How do you or your business make investment decisions? Whether it is stocks, property, fixed-term deposits, or even savings accounts, it starts by ascertaining the ideal investment for your risk appetite. Then, you have to weigh both the financial and non-financial factors against your needs, interests, and goals. Let’s explore some of these factors below: –
1. Investment Criteria
Your investment criteria entail a set of performance measures by which an investment decision is judged. In business, typical targets from the investment include the expected return on investment (ROI). ROI helps you estimate how much profit you can get in a specific period and the growth rate of the investment.
This profitability can be dividends, interests, capital gains, and appreciations. Whereas bonds, GICs, and savings accounts pay interest, you get dividends from the stocks you own depending on the company performance. And, selling your ETF, mutual fund, shares, or bonds for more than your actual cost will result in capital gains. Also, the higher the risk, finscreener the greater the expected return on investment and vice versa.
2. Risk & Uncertainty
Gauge the prevailing business climate to determine the potential risk of losing money should any unforeseen event happen. Hence, a risk-taker would pick shares over fixed deposits.
3. Investment Period/Payback Period
When do you intend to get your money back from the investment? Pick a long-term, medium-term, or short-term investment program depending on your investment goals and personal needs. Investments with lengthy payback periods offer higher returns than short-term ones.
4. Liquidity of the Investment
How fast can you convert your investment into cash? This liquidity will help you determine which acquisitions will cushion you from financial distress due to emergencies like accidents and natural disasters. A savings account is the most liquid type of investment. And, most purchases of land, buildings, and real estate have the least liquidity.
5. Tax Implications
Different investments attract varying tax rates and obligations. Then, find out the tax obligations associated with your chosen investment option. Also, confirm if the tax is payable now or when you liquidate the asset.
6. Rate of Inflation
A rising inflation rate can dilute your investment. For, it erodes the value of your anticipated returns. Ideally, your ROI should be more than the prevailing inflation rate. And, if you invest in such assets as shares and property, a rise in inflation can result in the appreciation of your investment.
7. Market Volatility
Often, the political situation, natural disasters, international economic trends, or moves by the big players in the industry can create a volatile investment market. For example, a big player pulling out of the market could cause panic as more investors liquidate their assets. In turn, the market may experience high price fluctuations. Then, stay up to date on the happenings in the investment market to anticipate such volatility.
8. Budget
Next, did you budget for this investment? Or, how much do you have for investment? Have your investment option in your budget and determine how it will affect your cash flow and any other financial decisions for that year.
Non-Financial Factors
Non-financial factions when choosing an investment are your corporate goals and organizational culture. That is, what are your key objectives? Does this investment help you achieve it? For example, if you are a startup wholesale business and want to expand your operations and market share, you may want to invest in state-of-the-art logistics solutions. Likewise, assess your attitude towards risk-taking.
Bottom Line
As you decide on which investment options will meet your financial goals, work with an experienced financial advisor for more insight. These advisors are familiar with the investment market and have up-to-date information on the performance of these investments.
