5 Things to consider before making an investment decision

Making an investment decision can be tricky for some, especially those new to the game. With so many options and products out there, how do you know which one is right for you?

Why are you investing?

The reason why you are considering investing is vitally important when choosing the right strategy and products to invest in. You have to consider your personal circumstances and goals to make sure you are making the best decision.

What are your investment goals?

Are you after quick returns, a home to live in or a long term strategy to set yourself up for financial freedom? Knowing what you want to get out of your investment will guide your decision. Once you have a clear idea of your goals, then it’s time to research what products and services are best suited to reach them.

One strategy you can use is SMART goals. These are goals that are specific, measurable, relevant, achievable and time bound. Use these parameters to then find investment products that can potentially help you achieve the returns you want, in the time you want in a way that suits your personal ethics and investment style.

What have you got to invest?

You know you want to invest, you have a goal and a basic plan. Next step is determining the funds you have at your disposal, and what you are willing to invest at this time.

What is you budget?

We all know the importance of having a budget, and using our money wisely. Before making an investment decision, look at your incomings and outgoings and determine, realistically, how much you have to invest? Before you put money away in a long term investment, it is wise to make sure you have enough in cash to cover little surprises that may pop up like car repairs, trips to the dentists or sudden loss of income. Typically people aim for six months worth of living expenses in an emergency savings account, but it’s up to you to decide how much you want to set aside before you start investing.

Investing is not free, each product has their own fees, costs and taxes involved. Consider what taxes, duties, brokerage costs and transaction fees may be applicable to your chosen investment before finalising the deal.

Related Article: How to start investing in Australia

Where are you investing?

Next step is where do you want to invest. Depending on your goals, you may want to consider international options, say on one of the US exchanges, or keep your money close to home in the ASX or property.

Australian options

There are several investment options available to Australian investors. The ASX has opportunities for substantial wealth growth, and it is also a very interesting time in the Australian property market. Keeping money close to home in this way can improve liquidity, and can also avoid currency conversion costs.

International markets/global consideration

No matter what investment product you choose, global political, social and economic factors can have significant impacts. Before making an investment decision, research what has been happening in the markets and the wider context the market works in. This could be anything from a state or federal policy change to international conflicts or a change in government in a country which could lead to uncertainty in international markets.

International stock exchanges can provide opportunities to invest in some of your favourite companies, or potentially back the next social media juggernaut or tech mogul, but can come with extra risks. You will also have to consider the impact on trading with different currencies and in different time zones.

Related article: Risk and benefits of investing overseas

Who should you invest with?

Ethical Considerations

If choosing to invest your money in shares of a particular company, it is important to ensure that this company aligns with your personal values. More and more investors are choosing to put their money in companies and ETFs that are environmentally friendly or focus on sustainability. Prioritising ethics does not necessarily mean that you have to sacrifice potential profits, read more about some of the best performing ethical investment strategies here.

Risk tolerance

Risk is a part of every investment, but can vary greatly depending on a myriad of factors. You should determine your own risk profile before investing. As much as we would love a product with low risk and high return, it is most likely that higher return investments will involve more risk. Market conditions, time frame and investment style all impact risk, so it is important to consider that in all other aspects of decision making.

Diversification

When making a new investment decision, you should consider your current portfolio, and assess how this new product will add value and diversify your wealth. Spreading out your investments in a range of industries, stock options and assets can potentially reduce risk and improve returns, but it depends on your own circumstances.

 Related Article: Are investors becoming more ethically conscious? 

When are you investing, and for how long?

Timeframes

Are you after a long term investment, or looking to improve your wealth in the short/medium term? This time frame, or horizon as it’s known in investment circles will help determine which investment option is right for you. Most options fall into three broad categories being; short term (under five years), medium term (5-10 years) and long term (10+ years). Each one has its pros and cons, it is important to consider each and determine which one you believe will best help you achieve your goals.

Liquidity

Liquidity refers to how easy it is to access this cash if need be. Some high liquidity investments like shares can have your money back to you within several business days if necessary, whereas investments like property or businesses can take much longer to process and settle before you can access the cash. As discussed at the top of this article, you need to consider how much quickly you need to access your money and how much money you have squirrelled away for a rainy day.

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