How do I Avoid a Bad Investment?

Avoiding a bad investment is almost as important as finding good investments that are likely to yield decent returns. In order to protect yourself from taking on investments that are more likely to fail, the same basic steps used in identifying good investments come in very handy. In order to avoid a bad investment, take the time to look at the past performance and the financial stability of the entity issuing the security, and develop a realistic projection of how that security is likely to perform in the marketplace within a specified period of time.

Before attempting to identify any security as a good or a bad investment, investors should make sure they understand why they are investing. This involves identifying life goals as well as financial goals. By understanding the reasons behind the investing activity, it is much easier to decide if high-risk investments are more in line with those goals, or if low-risk investments will do the job. As part of the process, the investor will also be able to determine if he or she should focus more on stocks, bonds, mutual funds or futures, or if diversifying the portfolio would be the best bet.

With the reasons for the investing firmly in mind, the investor can then begin the process of evaluating various types of securities. Brokers can often offer excellent financial advice in terms of investments that are in line with the investor’s personal goals. While the advice of an expert is key, keep in mind that you still need to educate yourself about any stocks or bond issues suggested by the broker, before making any final decision.

Begin by considering the current financial status of the entity issuing the security. One common mistake that investors make is making assumptions based on the reputation of a company. While a given security may have been an excellent choice five years ago, the financial situation of the issuer may have changed since then. Since a declining company will often lead to a declining stock issue, make sure any securities you take on are supported by a financially healthy company. Failure to do so could put you on the road to owning a bad investment.

Don’t forget to consider the past history of the security. This will provide background on how the security performed in different markets and economic climates. From there, take the time to understand what is happening in the market today and what is likely to occur in the days ahead. By having a firm grasp of market conditions, it is possible to create a realistic projection of what will happen with the security in the future. Assuming those projections are correct, you will be able to determine if buying the security is likely to be a good move or if the purchase will likely yield a bad investment.