These days, it seems like there’s an “investment opportunity” every time you turn around.
But how do you find the right investment opportunity for you? And, even more importantly, how do you avoid scams?
Let’s take a look at some of the things to consider as you review investments and try to come up with the right approach for your portfolio.
5 Tips for Reviewing an Investment Opportunity
Before you put your hard-earned money into any type of investment, it helps to review the opportunity and make sure it fits your needs. And that it isn’t a scam. Here are some of the most important things to consider when evaluating an investment opportunity.
1. Make sure the investment fits the rest of your portfolio strategy
Most effective investors have some type of strategy. They know what they want their portfolio to accomplish and choose investments that make sense for their goals. Simply putting money into an investment isn’t enough for it to work for you. You also need to make sure it fits with the rest of your portfolio strategy.
2. Understand your risk tolerance and where the investment fits
Next, consider your risk tolerance. Both your financial and emotional risk tolerance should be taken into account.
First, only use money you can afford to lose. Any investment comes with the risk of loss, so you need to make sure you aren’t parting with a chunk of money you might need in the short term. Some investment opportunities (such as real estate or some alternative investments) might tie up your capital for a year or more.
Additionally, some risky investments might be outside your emotional comfort zone, resulting in difficulty coping with the uncertainty. In that case, you might want to look for investment choices that better work with your emotional needs.
3. Review company management and other factors
Look at the business structure of the company or consider other factors related to the investment opportunity.
Does the track record of past endeavors indicate a chance that you’ll see results with this opportunity? What kind of principals are involved?
You can also look at the business plan and consider the problem the company aims to solve. It’s important to consider these issues because you want to make sure the investment is viable over the long term.
When reviewing alternative investments, like tax liens or crypto projects, it’s important to consider the risks involved and whether there’s a chance the attempt could fail. For example, a crypto project might not pan out or be widely adopted and you could lose your investment.
4. Review the fees associated with the investment opportunity
In many cases, you’re likely to pay some type of cost when you invest. It might be in the form of a spread, or it might be a fee.
For some investment opportunities, you have to use a special custodian, and that can cost quite a bit each year. Some platforms that allow you to invest in alternatives like wine, paintings or real estate developments come with various fees. These fees might be flat fees or be a percentage of your account value.
Before you invest, make sure you understand the fees and how they impact your real returns.
5. Consider the tax implications
Finally, make sure you understand the tax implications. Before investing, think about how gains (or even losses) might fit into your overall financial planning. Different assets might be taxed at different rates. For example, some gold coins and bullion are taxed at the collectibles capital gains rate instead of the “regular” rate.
Make sure you understand which items can be held in a tax-advantaged account, like an IRA. You can usually get a custodian to help you keep certain investments in a self-directed IRA, but you’ll pay a higher fee for that service.
Watch for Investment Opportunity Red Flags
Don’t forget that sometimes that “investment opportunity” is actually a scam. Some of the red flags that the Securities and Exchange Commission points out with investments include:
- An opportunity that is “risk-free” or feels like it’s offering returns that are too good to be true
- The person offering the opportunity isn’t a licensed investment professional
- An appeal to FOMO by letting you know that everyone else is getting involved—and making a lot of money
- High pressure to invest immediately or risk missing out and “staying poor”
- Promises of guaranteed wealth or a fool-proof system
- You’re asked to pay fees or get the investment using a gift card, credit card or by sending money to a personal account
Bottom Line
There are plenty of great investment opportunities out there. However, many of them are boring and don’t promise a fast track to wealth. Carefully consider where you put your money before risking it in what could turn out to be a scam.