What's a good investment?

5 characteristics of a good investment

These are some of the traits of good investments. Your investment does not need to have every trait listed; however, there should be an explanation for any 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. Fair value

If you overpay for an investment, you are putting yourself at a disadvantage. Good investments are usually bought at a good price. Market timing has its limits, but business valuations play a big part in determining future returns. In other words, what is your business worth in potential revenue. Buying at a fair price is not necessarily the same as buying at a low-price, but the price should always be reasonable and based on reasonable growth and revenue assumptions. Business investments should be based on revenue and not just on the assumption that the business’s value will increase. There may be occasions when you can justify paying a premium because you have reason to believe the premium will expand, but a business’s main purpose should be revenue.

  1. Value will increase over time

Great investments are usually businesses that increase in value over the long term. Whether it’s a business or real estate, this occurs when the asset owns or produces something that is in demand. Business values increase when businesses reinvest profits to enlarge earning potential (expansion). Property values increase because real estate is limited while demand is not. Any company that can grow market share within a growing market can be a good investment – provided you buy it at the right price. Another way to consider this is by asking how long before your business will be profitable? Most businesses take 2-3 years before they become profitable. Becoming profitable sooner increases the value of your business.

  1. Is it 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. Cryptocurrencies can be sold through exchanges, like other commodities. Businesses dependent on machines can always be sold on the secondary market. Real estate is even less liquid, and its liquidity is based on an ever-changing market.

  1. It generates income

If an investment is not expected to grow in value, it should generate revenue. Many of the best long-term investments turn out to be those that have a steady, continuous yield. This can come in the form of revenue, stock dividends, bond coupons or rental income from properties.

Not only does a yield give you a passive income, but the ability of an investment to generate cash proves it is profitable. There is often a danger that growth investments can be speculative. Investment products, businesses and properties that can generate cash are less likely to be speculative investments.

  1. You understand the investment and the risks

A good investment for an experienced hedge fund manager may not be a good investment for the average retail investor. If you cannot understand how an investment will grow, or create value or generate profits, it should be avoided. This goes for businesses, funds or any other structure.

Complexity is often used to mask a flaw in the business model. This applies particularly to complex trading and investments strategies and to derivatives. Risks comes with any investment, but if you do not understand what you are investing in, you won’t know how much risk you are really taking. The following are some of the types of investments that are best avoided unless you really know what you are doing:

  • Multilevel marketing or investment schemes
  • Derivatives – in particular binary options
  • Any product with leverage of over 3x
  • Leveraged and inverse ETFs
  • Trading strategies with a low win rate / high return profile
  • Small cap stocks that are not yet profitable
  • Any private investment that you do not have personal knowledge of