Four Ways To Choose Investments
“You can’t pick your family, but you can pick your friends.” - AT ETERNITY’S GATE
written by Jean-Claude Carriere & Louise Kugelberg and Julian Schnabel, directed by Julian Schnabel
(3.5-minute read)
There are many tried and true methods of choosing investments. Some have been tried and truly failed. Others have been successful for decades. One can really get into the weeds of researching the best available investment. But there are less complicated ways to view investments. The following is four different ways you can choose investments.
RISK
When we invest, we want to determine the risks associated with said investment. This is not to be confused with your personal risk tolerance. That’s a different type of risk assessment. I’m referring the investment itself. Some risks can be quantified.
There’s an actual formula we use as Financial Planners to determine the risk of an investment. I don’t have to tell you that stocks and bonds can go up and down. There’s an inherent risk in those. If you give your friend money to invest in her small business, there’s a risk you may never see that money again.
Another example is to consider the risks of an investment property. Tenants can damage the physical building. The value of the property could go up or down. The neighborhood could get worse, or better, thereby affecting your risk.
These are just some of the risks you have to weigh when in investing. There are plenty more.
COST
Price will obviously come into play, and not just the upfront costs such as a down payment for a home or the price of a stock. Ongoing fees should also be considered.
Going back to the investment property example, there are maintenance fees, loan interest rates, repairs, and a ton of other costs associated with property ownership. But there are also ongoing costs for owning certain stocks and funds. Some have expense ratios, front load fees, and back loaded fees. You may want to pay a professional to trade investments on your behalf, which might come with a separate fee.
RETURNS
The return on your investment is probably the main object of your admiration. If you place X amount of dollars into an investment, you want to get Y amount of dollars in return. That Y better not be lower than X or else you could have a problem.
There is no exact science to figuring out what a return on your investment is going to be. Some actually do have a figure associated with it, such as CDs or U.S. Treasuries. Currently, if you invest in a three-year U.S. Treasury Bill, then you are guaranteed to get a 4.09% return on your investment. This is one of the few guarantees since it’s backed by the United States government.
But we can’t have every investment backed by our government, so oftentimes we rely on other metrics such as historical returns. Over the last 30 years, the S&P 500 has averaged about a 10.7% return per year. Some professionals use forward-looking projections from sources such as JPMorgan. There are plenty of other resources out there, too.
Even if we can’t predict the returns, you can still monitor them and make appropriate decisions. If your investment returns are doing well, perhaps you want to add more. If they’re not going as planned, you may want to think about getting out. Either way, returns are a big part of the decision-making.
TAXES
Yes, taxes should be considered when deciding on investments. Questions should be asked, such as: Is the investment kicking off gains, interest, or dividends? Those might be taxed at different rates. Do I want to sell this investment for a long-term or short-term gain, each of which have different tax consequences? Do I want to sell this for a strategic loss to lower my taxes?
Home ownership can have its own set of rules when it comes to taxes as well. Some of these rules can be very beneficial to the seller.
When you decide to buy and sell your investment could also have major tax consequences. You should seek a professional before making any investment decisions, and that includes a tax professional.
There are many decisions that go into choosing the right investment. I hope these four ways of looking at them can help.
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