There are many different things that you can make money by investing in. Some of the most common investments that come to mind for people are stocks, real estate, precious metals, cryptocurrencies, and the list goes on and on. Depending on your situation and goals, all of them may not be the right fit for you. How can you know if an investment is right for you or not? While each and every situation is different, here are some general tips and questions to ask when trying to understand an investment and if it is right for you.
1. How well do you understand the investment?
This isn't to say that you need to know all the ins and outs of a particular investment. Maybe you are working with a professional who is helping you manage it. But you should at least understand the basics of how it works, and the person you are working with should be able to easily explain it to you.
2. Is it liquid?
Meaning, how easily can you sell it to get your money back. Whether it is or isn't doesn't matter. You just need to know that going into it so that you know where it fits in your plan and you don't get caught needing to get your money out of it, and you can't. An example of a liquid investment would be stocks because you can get your money back in a few days. An example of an illiquid investment would be real estate because you have to wait for a buyer before you can get your money out of it.
3. Know the risks
Every investment has risks. You just need to know that you understand what they are and how they can affect the investment going into it. No investment is risk-free, even cash, as, over time, your purchasing power is eroded due to inflation.
4. Does it fit your current goals?
For example, in the long term, you would like to add rental properties to your overall plan. Buying real estate usually involves coming up with some cash to put down. Is now the right time for your plan to have a large outlay of cash? Or could that cash be utilized somewhere else in your plan? Knowing your goals, both long and short, and where you stand currently is a huge part of investment selection.
5. Are you diversified?
Hypothetically, let's just say that this one particular investment was to go to $0 – how would this affect you? Being well-diversified helps to even out the ups and downs of the various investment cycles. It also puts you in a position where no single investment can destroy your financial plan.
It is not an easy task trying to choose investment opportunities with all of the choices that are available to people today. Having a core set of principles that helps to guide you when selecting investments is a must. Even the best investors like Warren Buffet do. His principles have kept him from investing in tech stocks in the past that would have made him a lot of money. But those same principals have also made him a lot of money over the years by staying disciplined. Being able to separate the good from the bad is a must and can help you to find success in investments that are right for you. Even if that means missing out on some good investments that just weren't right for you at the time.