How to Evaluate an Investment Opportunity
Recognizing an investment opportunity at the right time can mean financial success. But, missing out on that opportunity can mean the exact opposite.
Consider this example: In the 1990s, Investor One gets caught up in the thrill and hype of the Dot-Com Bubble. They start investing in all of the big names of the moment — Pets.com, Excite at Home, and more. They watch their investment portfolio balloon through the end of the decade.
They saw an opportunity, and they took it.
But that opportunity wasn’t for the long haul. By 2003, when the Dot-Com Bubble finally burst, many of the superstars of that run-up were forced out of business, their gains disappearing almost overnight.
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Then consider the example of Investor Two. Rather than jump on board the Dot-Com train, they decide to wait until things calm down and start investing as the market is declining in the early 2000s. So, rather than lose out on all of those paper gains through the bubble, they’re able to buy into the market at a much lower level and ride the long-term growth of the bull market up.
That’s another kind of opportunity.
Of course, evaluating an investment opportunity before the advantage of hindsight is easier said than done.
Questions to Ask Before Investing
Here’s what to keep in mind as you discern where to put your money.
- What type of investor are you? Not all investors come to the market seeking success the same way. Recognizing what type of investor you are will help to determine your specific goals and how they fit into your idea of success. Are you in your twenties or thirties and looking to slowly build a portfolio that will weather ups and downs? Or, are you nearing retirement, but don’t feel ready? Your circumstances and goals will determine what an investment opportunity means for you.
- What’s your strategy? If you are in it for the long-haul, it’s a good idea to pursue a fundamental investment strategy, which attempts to calculate the intrinsic value of a stock by considering basic economic factors such as revenue, expenses and income. Alternatively, technical analysis places greater value on trends and is more short term. Once you choose your approach, stick with it. In other words, if you choose a long-term strategy, don’t consider selling with every tick down of the market.
- How much risk are you comfortable with? Every investor should seek to diversify their assets and asset classes to some degree. The extent to which you choose to diversify should be guided by your long-term goals and interests. According to the Modern portfolio theory (MPT), greater risk is an inherent part of greater reward. As a matter of course, you should determine the level of risk that you feel comfortable with, and then optimize your portfolio with less or more diversification to match it.
- How closely can you follow your investments? If you have an advisor following your portfolio, great. If not, be sure to keep a pulse on how things are going. While you shouldn’t lose sleep or stress yourself with every market jump, knowing how your portfolio is performing will allow you to make small, as-needed adjustments. This might mean adding a new asset or shifting funds proactively. Tracking how your portfolio is performing along the way will prevent a big surprise near the end of the road.
- Are in sync with your plan? The market will move, and especially if it plummets or skyrockets, you may panic or consider selling. Any moves to sell current assets or purchase additional assets should be in check with your original plan. Reacting to market shifts might feel tempting, but maintaining a steady course often pays off more successfully.
Making money on your investments is a matter of investing when assets are priced lower than their intrinsic value, which will result in financial gain after a period of time.
Even if you don’t always pick a winner, every investment is an opportunity to learn and will help you to improve your decision-making in the future.