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How Do I Assess an Investment?

How Do I Assess an Investment?

We have discussed the following Back to Basics personal finance articles:

How do I assess an investment?

Over the internet you see a lot of people asking: Which investment fits me?

And in general, the crowd goes like: Depends on you.

Which is actually true – investing is something really personal. What fits me, might not fit you. My age, my goals, my needs, my wants, my history, my dependencies, my salary, etc. – everything is variable.

When you open a mutual fund or a UITF, usually you fill out this questionnaire to assess your risk profile. You then tally the points to arrive at a certain score and determine which category you fall into. From there, a relationship manager will speak to you about the appropriate investment funds according to the result of the questionnaire.

Here is a 7 point checklist to find out if an investment fits your needs. It could be relative, because all of us would have different dreams and future goals. Before you invest, make sure you go through this simple checklist and study before you invest.

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  • Purpose – Even before getting into an investment you should ask the basic question why. Why are you interested in this kind of investment? What is’t in this investment that will help you achieve your financial goals? One person buys a raw piece of land just because it’s cheap – but has no plan at all on what to do with it. You should know your purpose before you even invest.
  • Return – This is what you would normally hear as Return On Investment (ROI). This refers to “kita” or income. Note that this should always be higher than inflation if you want to maximize your investment. Inflation is said to be the silent savings killer. If you keep your money in a bank which earns 0.5% per annum, your money has been losing value against inflation which is about 4% today and who knows if it will increase in the future. You need to find an investment that will beat inflation.
  • Risk – In every investment, there’s always risk. This is the risk of losing portion or all of your capital or investment. Higher risk, higher return. No pain, no gain. You need to risk on to gain.
  • Liquidity – How fast you can sell your investment is the liquidity side. This is mostly applicable to properties. This is also known as your exit strategy. How do you plan to exit in your certain business? Or do you wish to pass on this business to your next generation? How long do you think will your business survive?
  • Horizon – How long do you want to stay invested? How long does the investment require before you get the entire capital back with income? Are you investing for the long-term or do you have short-term needs you need to fund in the near future?
  • Appetite – This depends on your personality and sometimes correlated to your age. If you are young, you can invest most of your money in equity or stocks since you can regain your investments given that you have longer working years ahead of you. If you are nearing retirement, you are usually advised to “play safe” with your investments and invest in bonds and securities. There is a simple suggestion on how much percentage you can allocate to high risk investments such as stocks. For example, if you’re age today is 25, you can invest 75% of your investment to storks. That is computed by subtracting 25 from 100.
  • Ability – This refers to your capability to invest for this product. How much can I invest? Do I have the funds? Am I in a rush to invest or I can think it through and compare with other investments? If you believe that you are knowledgeable on reading financial statements or charts, you may try out stock trading or investing. If you believe that you do not have the time to study all these information and you can rely on your fund manager, you can be better off investing in mutual funds or UITFs.

If it’s too good to be true, it might really be. So before you invest in something, study it first. Go through this checklist. People are scammed because they fail to study their own risk profile, and the investment itself. Sad reality is, those people who are scammed in the country are the masses, and hardworking laborers who simply want to hit what seemingly is a jackpot.

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 Every Filipino deserves to be financially free.


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