Spotting the signs of a strong investment

man using laptop

At first glance, there seems to be nothing to becoming an investor. All you do is get some money, pick an investment and then sit back and watch the returns come in, right?

Of course, this somewhat truncated description brings up more questions, like "How do I know I've chosen the right investment?" There are so many options out there that if this is one of your first times around the block, you might not be sure whether you've picked a winner or not.

Here are some ways you can feel sure about your asset allocation.

What is everyone else doing?

If you go with the crowd, you might feel safe and comfortable - after all, if everyone else is doing it, then it's got to be alright. But when it comes to investing - whether in shares, real estate or anything else - herd behaviour isn't necessarily going to be a winner.

If you're buying shares, then some of the most successful stocks of previous years were those which investors were mostly ignoring, such as Apple. Similarly, with property, it's buying real estate in areas that are up-and-coming, rather than momentarily popular, which is most conducive to long-term growth. With choices like these, you can make bigger returns than you would have going with popular options, and with a relatively small initial investment, too.

What does the market research say?

Of course, picking an investment that nobody's talking about isn't in itself a sure fire street to success. You also need to do your research, both about the wider market and what you're investing in.

For example, if you're buying shares in a company or taking a large ownership stake, delve into the history of the company and its daily operations. Is it running well? Can you see what it will become in some years' time? Or does it maybe provide a unique and increasingly necessary service?

What is the risk-reward ratio?

This all depends on your personal preferences, financial circumstances and stomach for risk. Don't simply focus on the returns at the expense of the possible risk, and vice versa. Ask yourself what you're getting from making this investment, and make sure the financial rewards are enough to offset what you might lose.