Investing can be intimidating, especially when it comes to picking the “right” investments. Nobody wants to make a costly mistake that can lead to financial losses. However, there are strategies you can employ to mitigate risks and find good investments that align with your goals.
In this article, we’ll explore five signs that indicate you’ve chosen solid investments for your portfolio.
What are good investments?
When most of us think of investing, our minds immediately go to stock picking.
Most of us probably start out trying to figure out which stock is going to be “winner.” However, you don’t actually need to get involved with investing in individual stocks to be successful.
Before you get into stock picking, consider the possibility of investing in index mutual funds. The best part? You don’t have to worry about jargon and finding the “right” investment when you own a broad swath of the market.
With an index fund, you own a piece of everything on a specific index. This might be a collection of bonds, a collection of stocks, or some other collection of assets.
Essentially, one of the easiest ways to start investing and keep pace with market growth is to consider an all-market fund.
You don’t end up with sexy returns when you follow this strategy, but you do have a better chance of gains over time. Plus, you get instant diversification because you are invested in a wide variety of assets.
Overall, the stock market has never had more losses than gains in any 25-year period. It may see losses in a year, or struggle over a five-year period, but over time the trend is toward gains.
So if you don’t want to mess with picking stocks, indexing can be a viable strategy.
But if you still want to look for good investments by choosing individual stocks or putting money into other assets, here are five signs to look for before diving in.
1. Focus on the Fundamentals
Before diving into individual stocks, it’s essential to evaluate the fundamentals of a company. These fundamentals are key indicators of a company’s health and are unrelated to short-term trading patterns or price fluctuations. Some fundamentals to consider include:
- Cash Flow: Positive cash flow is a sign that a company can meet its financial obligations, return money to shareholders, and reinvest for growth.
- Return on Assets: This metric determines how effectively a company utilizes its assets to generate income.
- Management: Good leadership and growth-oriented management are important indicators of a company’s long-term success.
To assess a company’s fundamentals, it’s crucial to compare them with other companies in the same industry or sector. Companies with solid fundamentals have a higher likelihood of weathering market and economic storms.
2. Evaluate Long-Term Viability
Long-term viability plays a crucial role in good investments. Consider whether you can envision yourself staying invested in a particular opportunity for at least five to ten years. Long-term viability involves:
- Feeling confident about retaining the investment for a considerable period.
- Assessing the potential for reinvesting dividends.
- Examining the company’s business model, profit margins, and historical performance.
This principle applies not only to individual stocks but also to other asset classes. For example, if you’re interested in real estate investment, evaluate the long-term viability of the rental market in your area. Similarly, when considering commodities like oil and gold, research their potential for appreciation over time.
3. Examine Earnings Stability and Growth
Stability and growth are crucial aspects of good investments. Analyze the earnings of your chosen investment, considering both their consistency and growth. Ideally, you want to see consistent earnings growth over time.
While there may be fluctuations and occasional losses, consistent growth indicates a healthy and sustainable investment. Beware of investments that boast suspiciously consistent earnings, as this might signal a potential scam. An investment’s quality can be determined by assessing the reasoning behind the earnings and ensuring they are sustainable.
Avoid investments that rely on declining revenues, increasing costs, or other unsustainable factors. High-quality earnings are a strong indicator of a good investment opportunity.
4. Look for Consistent Dividend Growth
Dividends can be a valuable signal of a company’s health and stability. When a company consistently increases its dividend payouts, it demonstrates its ability to distribute a portion of its earnings back to shareholders. Rather than focusing solely on high yields, look for companies with mid-range dividend yields that consistently grow over time.
A useful starting point for identifying such companies is the list of dividend aristocrats. These are companies that have consistently raised their dividends year after year, even during market downturns. While it’s not the only list to consider, being on the dividend aristocrats list often indicates a company’s overall health and investment potential.
5. Align Investments with Your Goals
Ultimately, the success of an investment is determined by its ability to help you reach your financial goals. While an investment may be considered good for someone else, it may not be suitable for your specific needs and risk profile. When evaluating an investment opportunity, consider the following factors:
- Potential Returns: Assess the likelihood of the investment’s growth aligning with your long-term goals.
- Historical Performance: Look at the investment’s track record to determine its consistency and stability.
- Risk Profile: Determine if the investment matches your risk tolerance and comfort level.
Ensure that your investments align with your long-term goals and provide you with the confidence to weather market fluctuations and achieve financial prosperity.
Additional Considerations
Once you become more experienced in investing and asset selection, several other data points and strategies can enhance your decision-making process. As you continue to explore, you may encounter terms such as PEG ratio, P/E ratio, technical analysis, and price-to-book ratio. However, it’s advisable to start with simple investments and strategies, gradually expanding your portfolio as you gain confidence and knowledge.
Remember, investing is a journey that begins with a solid foundation. By adhering to these five signs of good investments, you can set yourself on the path to financial success and achieve your long-term goals.
