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Factors to Consider When Making Investment Decisions

ByTristram Ouma

Apr 19, 2022
Factors to Consider When Making Investment Decisions

Investing is a complex process that involves a lot of thought.

But the more you know about yourself and how you make decisions, the easier it will be to make good choices that fit with your goals and abilities.

By understanding your own tendencies, you can create a plan that is more likely to succeed and stay invested in it through thick and thin.

In the article, I will help you understand these factors to make more informed decisions when investing your money.

I will also provide some tips on what types of investments that might be best for different people at different times in their lives.

Finally, I will discuss some common mistakes that investors often make and advise how to avoid them yourself.

Ready?Let’s get started.

Key Factors to Consider When Making Investment Decisions

The following are key factors that you should take into account when making investment decisions:

1. Your Objectives

When you have established goals and know what your investment timeframe is, you can determine which kind of investments suit you.

For example:

  • If your goal is to build a retirement fund, consider investing in mutual funds with an extended time horizon that includes stocks and bonds.
  • If your goal is short-term (3 years or less) and you are investing for a specific event such as buying a house or sending your child to college, then it’s best to consider conservative investments like certificates of deposit (CDs).
  • If you own a business and want to invest for growth, but also need some cash flow from the investment, then dividend-paying stocks may be appropriate for you.

The most important thing is that the investment meets your objectives and fits in with your overall plan.

However, you should never make any investment just because someone says it’s a “sure thing.”

Remember to do research, weigh all risks and benefits, talk with experts when appropriate, and only invest what you can afford to lose.

If you do that, then you will understand the importance of investment.

2. Your Timeframe for the Investment

The number one reason people do not invest is because they do not understand the options available to them.

The second reason is that they don’t have a target date in mind for when they want to sell their investments. This is especially true for retirement funds, where most people have only a few years to live after saving for decades.

The first thing you should consider when making an investment decision is your timeframe for investing.

You should make sure you decide how long you need to hold onto your investments before selling them and taking out your profit at the end of that period.

You also need to decide what level of risk you are comfortable with and whether or not you want any type of safety net against possible losses on your investments if market conditions or some other factor goes against you during that timeframe.

Once you’ve decided how long until you will sell your investments, think about why?

As we have discussed above, having an objective is key.

There are many reasons why someone would want to invest, so you must determine which type of investor (and therefore which kind of investment) will suit your needs best.

3. Your Risk Tolerance

There are a lot of factors to consider when making investment decisions, but the first and arguably most important one is your risk tolerance.

By risk tolerance, we mean your ability and willingness to lose some or all of your original investment in exchange for greater potential returns.

Here’s is something interesting about risks:

The more risk you’re willing to tolerate, the higher your potential returns.

But you need to be comfortable with the possibility that you could lose some or all of the money you invest.

A good way to gauge how much volatility (ups and downs) in your portfolio would make you uncomfortable is to imagine that its value dropped by half overnight.

If that thought makes you worry about having enough money for retirement, then a low-risk investment strategy might be best for you.

However, if losing half of your portfolio’s value would not affect how long or comfortably you could retire, then a moderate-to-high-risk investment strategy like those we will discuss below might work better for you.

4. Your Liquidity Needs

Liquidity refers to how quickly you can access your money. Generally speaking, the higher an investment’s liquidity, the easier it is to convert it into cash without taking a loss. (For example, checking and savings accounts are highly liquid investments.)

The amount of liquidity you need should dictate the types of investments that you consider.

If you don’t have very many emergency funds and might need to convert your investment into cash at any time, consider investing in highly liquid assets like cash equivalents.

However, if you have several emergency funds set up and won’t need to withdraw from your investments for at least a few years, lower-liquidity assets like stocks may be appropriate for your goals.

5. Your Tax Situation

One of the most important factors to include in your investment decision involves your tax situation.

While some states and countries have more favorable taxes than others, individuals who are taxed on their investments are generally able to pay a lower rate than non-taxable investment types.

The exact amount will depend on your location, type of income, and marital status. Consult with an experienced financial advisor today to determine if a taxable investment is right for you!

6. Return on investment

The return on investment (ROI) is the amount of profit or loss generated on an investment relative to the amount of money invested.

ROI is expressed as a percentage and is typically used for personal financial decisions, to compare a company’s profitability, or to compare the efficiency of different investments.

For example, if you put $1,000 in a savings account that pays 2% interest per year, at the end of one year you would have earned $20 in interest. Your ROI would be calculated as (20 / 1000) x 100 = 2%.

Say you invest $10,000 in shares worth $50 each. The value of your holdings increases 10%, to 55 dollars per share. If you sell your shares at this point, you will receive ($55 – 50) x 200 = $1,100 from the sale. Your ROI would be calculated as (1100 / 10000) x 100 = 11%.

Final thoughts on Factors to Consider When Making Investment Decisions

Investing is super important when you have these factors in mind. This is because they will help you make informed decisions and also focus on the most important things.

So those are most important things to consider when making investment decisions.

Tristram Ouma

I am a content marketing consultant, blogger, and freelance writer. I live in the beautiful city of Nairobi, Kenya with my family. My passion is to write as well as share unique content with my audience.

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