How to Vet an Investment Opportunity

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Most Americans admit that they don’t have enough money saved up for retirement. They are behind and as a result, expect to be working into their retirement years.

It’s incredibly sad, yet its the reality for most people. But it doesn’t have to be that way for you. If you start taking action today, by putting money into the right investment opportunities, you can start moving closer and closer to a comfortable retirement.

But you can’t just invest in anything. You need to vet each investment opportunity carefully to ensure it’s a smart, safe place to put your money.

Every time someone tries to beat the market with some new, exciting opportunity, they get burned ad wished they had played it safe.

Wondering how to examine an investment opportunity? Keep reading below to find out now. 

Look at the Risk

When presented with an exciting investment opportunity, the first thing you need to as about is the risk level. High gains are exciting until the entire thing falls apart and you lose your investment.

The first of your investing decisions is to evaluate the risk and decide if its something that aligns with your portfolio.

Ask yourself what happens if this opportunity collapses. Will you be struggling? Or will your portfolio recover, thanks to diversification? 

Every investment opportunity involves risk, but some of the much more obvious risks than others. Investing in real estate is much less risky than investing in a brand new tech startup, where most never take off, to begin with. 

Consider the Fund Requirements

Most investment opportunities will have a minimum amount required in order to invest. You can decide right away if an investment has potential based on how much capital you have access to.

You shouldn’t liquidate other investments just to fund a new one. You should always stick to your investing strategy, putting your money in the assets that make the most sense.

Dedicate a small portion of your portfolio to riskier investments.

Who’s Behind the Opportunity?

When investing in something new, you are just investing in the asset itself. You’re investing in the team behind it. The success of a particular asset is tied to someone else.

If investing in a new stock, the gains or losses you experience are correlated with the performance of the company, specifically the leadership team.

Research the team behind a project and understand their background, their experience, and their motivation.

If someone else is presenting you with an investment opportunity, you need to understand their motivation as well. Is it coming from a trusted source, like a family member or friend? Or a colleague with investing experience?

Or is it coming from someone you don’t know very well? If it seems sketchy, it could be more of a Ponzi scheme, or that person could have a financial interest in you participating.

Understand the Fund Structure

From index funds and mutual funds to more complicated asset groups, there are plenty of places to park your money, some are better than the rest.

The problem with many such funds is that they are actively managed, and so fees on mutual funds can be quite high. This eats into your gains and lowers your wealth-building potential.

Luckily, that’s why commingled funds exist. Commingled funds are like mutual funds, but they pool together funds from various different investors. So your money goes in with other people’s money. This structure streamlines the investing process, lowering management costs overall. 

There are many other variations of funds you can invest in. It’s up to you to understand the structure of the funds, who all is involved, and what the fees are associated with participation. 

Consider Your Age

When evaluating investment opportunities, your current age will determine what investments you make and which ones you pass. When you’re young and have little in your portfolio, your main goal is to grow as fast as possible. That means you’re able to take on some higher-risk investments.

With little capital invested, you can handle major price fluctuations. And if something were to go south, you have plenty of time to recover and get back on track.

As you get older though, your goal isn’t growth. Your goal is consistency and stability, to ensure the money is there when its time to retire. 

That means avoiding the most high-risk, high-reward investments. Once you hit a certain point, you just need to coast. Modest growth is all that is needed to ensure many years of a comfortable retirement. 

Is There Liquidity?

Before you ever invest a dollar, you need to know your exit route. That is if you need to get out an investment for one reason or another, is there an opportunity to do so?

Is the market liquid enough for you to recover your capital quickly, or are your funds locked up?

Real estate offers some of the safest returns with low risks. But it’s not exactly a liquid market. Even if you can sell a property in a day, there’s a process required that takes weeks, if not months to complete.

That’s one reason that stocks are a major part of most investors’ portfolios. They are highly liquid, so if you need to sell ad move your capital elsewhere, you can do so in a matter of minutes. 

Tax Advantages of an Investment Opportunity

Lastly, consider the tax implications or advantages of a particular investment strategy. Some asset classes are more favorable when it comes to taxes than others.

Real estate, for example, is the ultimate tax-advantaged asset. There are countless write-offs available, making it easier to keep more of your money.

Stocks on the other hand aren’t as tax-friendly. Sell and pay tax. Crypto is even worse, as almost anything you do triggers a taxable event, which is very difficult to track if you’re an active trader. 

Develop Your Vetting Process

So how do you vet an investment opportunity? You’ll be faced with many ver your lifetime, so it pays to develop a consistent pre-investment analysis template.

That way, you can just run through your checklist each time you find an opportunity and compare it to your goals.

Looking for more information like this? Visit our blog now to keep reading.

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