One of the best ways to build wealth over time is to invest. But what makes a good investment?
As you engage in financial planning, it's important to include investing in your calculations. Investing is one of the best ways to build wealth over time. Indeed, there is a good chance that you aren't investing enough to meet your lofty goals for the future.
Even if you know that you need to invest more, though, you could be having trouble knowing what to do next. What trips many people up is the worry over trying to figure out what makes a good investment. You don't want to pick the wrong, over-hyped stock and end up losing big over the long term. You want to choose good investments that are likely to offer returns over the long haul.
While I'm not investment professional or expert, I am learning a little about what makes a good investment. Here are a few things to keep in mind:
What are the Fundamentals?
If you are looking at individual stocks, or considering a specific asset, it can help to look at the fundamentals. Consider the “big picture” items associated with the investment. If you are looking at a stock, learn how to read balance sheets, and learn how to spot indications that you are dealing with a solid company — or indications that the company isn't doing so well. When investing in other assets, consider the items that affect price, such as transport, political situation, and other factors. Understand the underlying factors in what makes the investment tick. Solid fundamentals usually mean a good investment.
Look for Value
Don't go with the hype. Instead, look for true value when you invest. This means that you need to learn about different methods of valuing investments, and search out investments with good valuations. You want to be able find stocks and other investments that are underpriced in relation to their value. An undervalued investment is more likely to provide better returns in the future. Try to ignore the hype, and look for true value in an investment.
Does It Complement Your Plan and Portfolio?
Another factor to consider when deciding is something is a good investment is to think about whether or not it complements your investment plan, and your portfolio. What works great in one person's portfolio might not be ideal for your portfolio. Consider how the investment will “fit in” with the rest of your investments. Also, consider whether or not the investment is likely to help you reach your goal. Successful investing requires that you do a little research, and understand what works as a good investment for you, depending on your goals, risk tolerance, and other factors.
Consider Starting with the “Easy” Investments
For many ordinary investors, some sort of indexing works really well. A good investment is one that you understand. If you don't have time to learn about what makes derivatives tick, and you don't want to take the time to understand the fundamentals that influence them, you shouldn't be investing in them. Some of the easiest investments to make are those in index funds and index ETFs. These investments are generally easy to understand, and they often allow you to look for value. Plus, you can spread some of the risk around, since you are investing in a collection, rather than picking individual investments. It can be helpful to start with these types of investments, and then move on as you have time.
Blog Resources on Finding Good Investments
There are different resources out there that can help you learn what to look for to find good investments. It's important to note, though, that there are many different theories about choosing investments, and understanding what makes them “good” investments. If you are looking for a few good places to start, though, here is some food for thought:
- Bogleheads.org: This is the Bogleheads forum, and features investment ideas and advice centered around Jack Bogle, the inventor of the index fund.
- Benjamin Graham: Three Timeless Principles: This Forbes article takes a look at value investing pioneer Ben Graham, and some of his principles (and his books) related to finding good investments.
- Rob Bennett: Some people disagree with him, and he rubs a lot of people the wrong way. But he has interesting ideas about valuation informed indexing, and he delves into a lot of what makes a successful investing strategy.
- Oblivious Investor: One of my favorite blogs about investing. This blog presents investing ideas, and investment evaluation, in a simple light.
- AAAMP Blog: Run by my online buddy Ken, this blog provides value investment management strategies for the self-directed investor.
What are some of your favorite investing resources?
Image source: Jacob Garcia via Wikimedia Commons