Pick the Right Investment

Picking the right investment is a difficult and sometimes trivial task, but it has to be done. So when you do make a choice, what do you do? Everyone is different, therefor everyone will use different methods of analysis to choose an investment that is right for them (i.e. high risk or low risk, foreign or domestic, etc). What should you consider?

First thing is first. What level or degree of risk are you willing to accept? Generally speaking, the more risky an investment the greater the return. However this can be respectively shown in the length of time an investment is held. So if you are a day trader and an investment is very volatile or has a high beta, chances are you may turn a big profit or turn a big loss. A riskier investor might choose an investment with a higher beta and a less risky investor would choose a lower beta investment.

The next decision would involve the type of investment (i.e. bond, stock, money market, mutual fund, etc.) Many people think that mutual funds are inherently less risky due to their diversified nature. However, mutual funds have degrees of risk associated as well (high risk, low risk, etc).

Bonds are investments that basically purchase a company's debt. A company has a few options to acquire funding: they can issue stock or issue bonds. By issuing stock the company sells ownership rights of the company to the shareholders. By issuing bonds the company sells debt or, in other words, issues IOUs with some stated rate of interest in return. Bonds generally make up the more secure side of a portfolio thereby earning less of a return comparatively.

Stocks are investments that can earn a greater return and incorporate greater risk as an owner of shares is inherently a stakeholder in the company. The higher the beta the higher the risk. The higher the Alpha the greater expected return.

Mutual funds are essentially a collection of stocks bundled in a share. A mutual fund is managed by a fund manager. The fund manager's responsibility is to assure the fund performs above and beyond expectations and pleases its investors. Risk levels of mutual funds vary and depend on the specific fund you choose.

With the understanding of a few basic types of investments, another consideration needed is length of time you wish to hold the investment. Generally, mutual funds should be held between 4-10 years to realize a gain depending on the fees associated with the fund. A gain from a stock purchase can be realized in a very short time when comparing to a mutual fund, however, more risk is associated with an individual stock purchase. A profit from a bond purchase can be realized in a short period of time given certain market occurrences. Bond prices and interest rates have an inverse relationship, so when interest rates are up bond prices should decline. Hence,if you think interest rates are going to plummet, purchase bonds.

Every investor is different and should consider the risk of an investment before making a decision. More articles with more in depth discussions of strategies are within this site. Do remember that generally time in the market is the greater idea. Timing the market is very difficult because so many factors are involved in determining prices.


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