Traits of a good investment opportunity for long-term success as investor

There are lots of different ways to make money by investing. Unfortunately, not all of them have a good chance of working out as planned. In this article we highlight the characteristics shared by many of the best investments. Using this list of traits as a checklist will help put the odds in your favor by avoiding investments with a high chance of failure.

Why should you invest?

Investing, which comes in many shapes and forms, is a way for us to lend money to the economy, and then share in the growth of the economy. Investment is required to generate wealth, and investors get to share in that wealth creation. Investors are also rewarded for taking on risks.

Investing is the most reliable way to reach your financial goals and become financially independent. Very few people will earn enough in their lifetime to retire by simply saving. Money that is simply saved will not keep pace with inflation, let alone grow. For this reason, most people need to take on a moderate amount of risk via a diversified portfolio of investments.

What is a good investment opportunity?

The difference between a good investment opportunity and a bad one comes down to the probability of success and the level of risk. There is a big difference between probability and possibility. Just because something may occur, does not make it likely to occur. Buying investments based on their value and possibly appreciating is speculating, regardless of the potential return. Good investment ideas have a high probability of success.

The level of risk for investment should also be low. Periodic losses and volatility are a part of investing. With a good investment, there should be very little chance of losing the total amount invested. Good investment ideas will hold their value or increase in value for a long time. This will allow you to exit at a good price. Short-term investments should have a high level of safety and liquidity.

5 Characteristics of a good investment

The following are some of the traits of good investments. Investment does not need to have all these traits, but there should be an acceptable reason for the absence of any one of them. For example, an investment does not need to provide income, if it is expected to grow in value. If it does neither, there is no point owning it.

1. Fairly valued

If you overpay for an investment, you are putting yourself at a disadvantage. Good investments are usually bought at a good price. With equity investing, valuation relative to future growth is key. Market timing may have its limits, but stock valuation plays a big part in determining future returns. Buying at a fair price is not necessarily the same as value investing, but the price should always be reasonable and based on reasonable growth assumptions.

The same applies to other asset classes too. Real estate investments should be based on yield and not just on the assumption that the price will increase. Cyclical assets like commodities should be purchased after a down cycle when fundamentals begin to improve.

The field of behavioral finance has shown that investors are often motivated by biases. Rather than getting caught up in market sentiment, investors should use extremes as an opportunity to buy and sell at attractive prices. There may be occasions when you can justify paying a premium because you have reason to believe the premium will expand. However, you should know whether you are investing vs. speculating. If you are speculating, risk needs to be managed carefully.

2. Underlying value will increase over time

The best investments are more often than not assets that increase in value over the long term. Whether it’s a company or real estate, this occurs when the asset owns or produces something that is in demand. Company values increase when they reinvest profits to increase capacity. Property values increase because real estate is limited while demand is not. While the stock market as a whole has increased in value, the same is not true for all companies.

Contrary to some popular investing myths, this doesn’t mean you should only buy blue chip stocks or those of well-known companies. Any company that can grow market share within a growing market can be a good investment – provided you buy it at the right price. On the other hand, some blue-chip companies are in industries in terminal decline.

ETF investing using broad market index funds will keep you invested in the companies that see their value increase. The returns may only be in line with the market, but your exposure to overhyped companies and industries will be limited. Quantitative investing research has shown that stocks that outperform share certain characteristics, known as investment factors. Factor investing is one way of picking stocks with better odds of generating good returns.

Many industries are undergoing a period of change due to social pressure. Environmental, social and governance issues are becoming increasingly important to long-term value creation. ESG investing factors are therefore becoming just as important as growth and profit margins for stock picking.

It’s not only stocks that can accrue value over time. Compound interest enables bonds and real estate investments to grow in value too. The value of commodities is a little bit more difficult to assess. Demand for commodities does rise, and supply is to an extent finite. However, the price of a commodity typically accounts for future demand. Commodities are more likely to rise in price when supply has fallen, and demand is beginning to increase.

3. It is diversified

Diversification is a key element of successful investment portfolios. To diversify when buying stocks, bonds, and other assets you need to build a portfolio of securities. When it comes to products like mutual funds or exchange-traded funds (ETFs), the products themselves offer various levels of diversification.

Funds that are spread across several sectors will offer better diversification over the long run. Investors are often tempted to invest in funds that concentrate on industries or sectors that are performing well at the time. These funds may not perform well when investors move on to other sectors.

4. It diversifies your portfolio or reduces portfolio risk

Any investment you add to your portfolio should be a good investment in its own right, but should also add diversification to the portfolio. For example, if you own an ETF that tracks the S&P 500, there is little point in buying another fund that tracks a similar index. A fund tracking a European index, or a global index would offer more diversification. Asset allocation ensures that a portfolio can weather any storm.

Adding instruments and funds from asset classes with a low correlation to equities also helps to reduce portfolio risk and volatility. Various methods of portfolio hedging can ensure your investments are not too closely correlated to equity markets. This will preserve value during a bear market or a stock market crash.

Data Intelligence Fund managed by LEHNER INVESTMENTS

Hedge funds exist for exactly this reason. Hedge funds can use leverage and short selling to capitalize on short-term opportunities and negative price movements. LEHNER INVESTMENTS  Data Intelligence Fund utilizes an innovative investment strategy that can generate returns that have a low correlation with equity markets. This is achieved by using artificial intelligence to analyze unique big data sets in real-time. The fund assesses market sentiment for each stock from user-generated data which updates in real-time.

Small private investments can also diversify a portfolio. Owning a rental property, an income-producing website, or a small business can all lower the volatility of your overall investment portfolio.

5. It is liquid

Different types of investments have varying levels of liquidity. Large-cap stocks and ETFs can be sold very quickly. Some funds, like hedge funds, can only be redeemed monthly or quarterly. Real estate and investments in small businesses are even less liquid.

There are several advantages to illiquid investments. Most investments that are not listed on an exchange do not have real-time or even daily pricing and so their values are less volatile. Illiquid investments can also prevent you from making impulsive decisions. In aggregate your portfolio should have a good level of liquidity. Whenever you consider a new investment you should consider whether it will make your entire portfolio more or less liquid.