5 Questions to Answer to Know If an Investment is Right for You

Investments are great financial vehicles for building wealth and achieving life goals. And there are now a lot of options to choose from, and each has its own pros and cons.

Finding the right one for your unique situation is important since not all investments are made equal, and one simple mistake can easily cost you your savings.

To ensure that you make informed and confident decisions, here are the five essential questions that will serve as your guide in determining whether an investment opportunity is right for you.

1. How Does the Investment Make Money?

In your own words, you should be able to explain how the investment will generate money. Understanding how it works is the first step in making an informed decision. If you can't answer this question, then it's already a sign that you need to take more time to research and comprehend the underlying mechanism of the investment.

If there's one thing you need to look for, it should be where the value is created. Because value is always attached to money, like how we exchange money for products or how we avail ourselves of other people's services.

A simple example of this is a bank’s time deposit. It’s common knowledge that the bank lends out our money with interest, and in return, we earn a percentage of it. Being able to explain it like this shows that you are aware of how the investment opportunity will yield profits, and with that, you can already proceed to the next question.

2. What Can Go Wrong?

Every investment involves some risk, so it’s crucial to understand the other side of the coin. You should be able to identify two things when discussing this, and those are a) the probability that it will occur and b) the effect on the investment.

For our bank’s time deposit sample, the risk here is very low, as banks often have a strict approval process. Meanwhile, it has minimal effect as well since the bank is the one who’ll be doing all the work. If the person who took out the loan doesn’t pay, the bank will be the one to collect. They also have the collateral and millions of dollars to cover it. You’ll still get your returns for your time deposit.

If you can explain again in your own words what could possibly go wrong, then you can now answer the next.

3. What Do You Need to Do to Minimize Risk?

Since no investment is entirely risk-free, we must understand what we can do to minimize the losses and maximize the returns. Do you have a personal role in the investment? Do you need to actively do something for it to earn money?

With our sample above, the bank is handling everything, so there’s really nothing we have to do. But there are investments that may need our active participation. For example, when it comes to stocks, do you have to monitor it all day or not at all? Or for your partner’s business, are you required to bring in more customers, or will you just be collecting your profits at month’s end?

It’s essential that these are all clear, as we don’t want to be the main reason for our investments not gaining as much as we wanted.

4. How Does It Help You with Your Life Goals?

A meaningful and purpose-driven financial journey depends on matching your investments with your personal life goals. You must know how this specific investment will help you in your own situation. Alignment is a crucial aspect when it comes to identifying if it’s suited for you.

A really good example of this is my personal experience of having my own juice stall in the Philippines while I’m here in Singapore. Aside from the fact that it required more attention from me than I expected, the time it took from me is something I could have allocated to other opportunities that will give me more fulfillment. I focused on the short-term earnings from it. That’s why I shifted to being a longer-term investor and focused on providing my financial advisory services to other people instead.

Keep in mind that as long as your investment doesn’t align with your life goals, it doesn’t matter how good the investment is on paper.

5. What is Your Intuition Telling You?

The saying, “When in doubt, throw it out,” might be associated with food, but it can be applicable with investments as well. If, after conducting all of your research and assessment, you still have a bad feeling about it, then simply don’t do it.

It’s better to be safe than sorry. You would rather invest in something you feel at ease with than something you’ll constantly worry about. Remember that there might be several investment opportunities out there, but it can only take one mistake for your money to be gone in an instant. Never give in to any external pressure when it comes to investments.

Conclusion

With that, you’re now equipped with a simple set of questions that will help you identify if an investment is suited for you. Understanding your goals, the risks, and the potential returns will help you with your decision making. Comprehensive research and risk management will reduce uncertainties, and aligning your investments with your own personal goals will bring you purpose and fulfillment in your journey.

Let’s not forget that there’s no one-size-fits-all strategy for investing. Trust your instincts, ask for advice when needed, and stay true to your values. You are now prepared to navigate the investment landscape confidently and secure a prosperous financial future.

P.S. Start your investments prepared with this checklist and familiarize yourself with these common investing mistakes. Check out these other articles we’ve published for you!