Smart investment is imperative to your financial well-being. It not only helps in growing your savings but is also your security cover during testing times. However, the sheer number of investment options in the market can be overwhelming. Without proper information, it can become difficult to pick out the best investment instrument.
You may try answering these questions to find the right investment instruments for your hard-earned money.

What is your financial goal?

It is a good idea to begin by writing down your short-term and long-term financial goals. It could include buying a home, saving for your children’s education or buying better health insurance. This little exercise will give you a perspective of the money that you will need on a short-term and long-term basis. You will also get to know how much money you will need to put aside towards each of these goals. This is important to ensure liquidity for your short-term needs. For instance, mutual funds may be good for long-term investment while money markets and savings account are good for the short-term.

What is your risk appetite?

Risk appetite is the risk a person is comfortable with. There are several individuals who are young and are comfortable with taking financial risks. There are others who believe that 80% of gains come from taking 20% risks. On the other hand are others who are averse to any kind of risk. There is no right or wrong strategy and it entirely depends on the amount of risk you are willing to take on. Having said that, higher risks may result in greater returns in the long term. You may want to have a healthy mix of both to optimize your returns. The stock market is considered to be risky as it is susceptible to market fluctuations. If you are content with no-risk but assured returns, you may consider government bonds or certificates of deposits. The returns are mostly assured in such cases.

What is your investment period like?

The time period for which you can afford to lock your money can give you an idea about the most viable investment options. For instance, if you want to save for your retirement but it is still far, you can lock your money in real estate. You can earn rental from this property to fund a part of the mortgage. Real estate generally rises over a significant period of time and will give you great returns in your future. If you want to save for a car, you may consider short-term investment options to get liquidity when you need it. Stocks, bonds and CDs are some good examples of this.

When will you exit from your investment?

Exiting simply means selling or taking your money out of your investment. If you are investing to buy a house, you would want to exit once you have found the right house, planned your mortgage and are ready to make the down payment. If you invest in a stock and were expecting 25% returns but the stock is plunging, it may be better to sell at a loss if you can’t wait.

Is your investment company reliable?

We have all heard stories of financial companies going bust and people losing their hard-earned money. To save yourself from this situation, it is better to do some background check. You may check the credit ratings issued by agencies such as Standard & Moodys or Fitch. You may even talk to a financial advisor to reduce your risks and put your money into a safe place.

Is your investment diversified?

 

Experts suggest that you must never put all your eggs in one basket when it comes to investing. This will reduce your risk and assure optimum returns in the long-term. Putting a chunk of your money into a number of airline stocks is not called diversification. If a government regulation gets announced in the future impacting the profits of the airline industry, you would lose a significant portion of your investment. To avoid such situations, you must choose investments that fundamentally different. However, you must not diversify to the extent that you are unable to track your investments and end up paying more in service charges.