Use These 3 Simple Questions To Assess Investment Trade-off

While these investment strategies can give you diverse ways of exploiting situations to increase your chances at making profit or reducing loss, at the very foundation lies a trade-off between risk and reward that all investors must be wary of.

Let’s be honest, making money is no easy task. In involves a lot of sacrifice, a lot of pain, and a lot of hard work. As such, whatever decision you choose to take with your money must come from a place of understanding and deliberateness.

In terms of determining the viability of any project or investment option, a level of analysis should be carried out. Depending on your expected investment goal, your risk threshold, the kind of investment, the time horizon, and as many other direct or indirect factors that makes your investment unique, there are one too many investment strategies that can be explored.

While these strategies can give you diverse ways of exploiting situations to increase your chances at making profit or reducing loss, at the very foundation lies a trade-off between risk and reward that all investors must be wary of.

To determine swiftly whether an investment is viable or not, or whether you will gain or lose from it, ask yourself these questions before making your investment decision:

What Are The Downsides?

With every potential investment option lies its downsides. These downsides are based on your investment objectives, the capital you have, and many more. For some investments, the downsides could be the riskiness of the project or investment to fail or result in a loss.

For some, it could be the fact that because of their low risks, profit expected or dividend would be very little. For an investor who needs to earn dividends, it could be that the investment is so growth-oriented that it ploughs back its earnings into the business to drive its objective forward.

It could also be the time requirement on the investment. As a retiree, leaving an investment to grow for decades for it to be very profitable is a luxury that he or she cannot afford. List out all the downsides of the investments and set it aside.

What Are The Upsides?

Just as you have outlined the downsides of the investment, also outline the upsides. What is it about the investment that has made it so alluring that you are considering sacrificing the risks or associated downsides as listed above, just to attain it?

Are the dividend pay outs great? Does the company seem to have a good growth trajectory ahead of it? By how much do you think it will serve as a passive stream of income or a tool towards attaining financial independence?

Do you have a cause you are also championing by virtue of the investment? Is it risk free? List all the upsides and possible upsides and set them down as well.

What’s The Probability Of Having The Downsides Versus The Upsides?

Finally, determine the probability of occurrence of the downsides and upsides. For example, if you are investing in money market securities like treasury bills, then you know it is risk free.

On the other hand, in terms of delivering the said objectives of exponentially multiplying your capital, it doesn’t do so much as the interest rate is too low to do so much. Determine the same for all your investments and compare with your investment objectives.

This assessment helps you determine what your investment strategies should be as it gives you a clear picture of where your desire lies. You will also notice that what one investor regards as a downside could be an upside to another investor and vice versa.

If you can genuinely answer these questions, you will set the right foundation for choosing the right investments that work best for you as well as the trade-off associated with each one.

Written by Lawretta Egba.