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5 ways to identify a good investment

Sep 19, 2018

Selecting a suitable investment can take time because of the sheer number of options out there.

And, while indicators can vary from sector to sector, there are some general rules that you should follow:

1. Calculate the exact take-home yield

The yield is the income return on an asset and is a key indicator of an investment’s value.

It cannot always be completely relied upon, however, since many companies only advertise the gross yield – a buyer’s income before all costs have been removed.

Given this, you’ll want to work out your exact NET income.

Any good investment will come with a comprehensive due diligence document. This will list all the costs you will be responsible for.

Together with income forecasts, you can quickly calculate your annual take-home yield (sometimes referred to as the rate of return).

If this is higher than 7% NET, you’re looking at a good investment.

Top tip: fixed income investing will provide you with a contractually agreed NET yield that takes all financial complications out of the equation.

2. Choose an investment model that is easy to understand

Too often, companies offer investments that are needlessly complex, with little risk protection and severely limited returns.

Classic examples of this are variable annuities from insurance companies and structured notes from banks.

The result is that private investors have no real idea of how much income they stand to make – and it can be much less than they expected.

If you can’t explain to a friend how you’ll make your money in 3 sentences or less, approach an asset with caution.

3. Invest in companies that have a transparent & successful track record

Since these organisations are usually not household names, you won’t initially know who’s trustworthy and who isn’t.

Given this, you’ll want to take a look at the track record of everyone involved – being able to easily obtain this on request is the first sign that a company has nothing to hide.

You can put your faith in a company if they have:

  • Successfully provided 1,000s of clients with similar assets
  • Positive testimonials from private investors like you
  • Accreditation from respected industry regulators
  • National or industry awards for the quality of their product

4. Look for evidence that risk has been identified and mitigated

You want to minimise the chance that you will not receive your income – with the worst case scenario being that you will lose your invested capital altogether.

This is why buyer protection is so important.

Ideally, you’ll receive a contract at purchase that stipulates the exact amount of income payable annually. This should be signed directly with the operator, rather than the consultancy or another third-party company, and drawn up by a law firm specialising in the relevant industry.

You’ll also need to find out whether the company has the necessary finances to back up your income or investment – this could be through an existing portfolio or an established partnership with a large-scale equity firm.

Without this, any promises about income are all but meaningless.

5. Ensure that you can access your capital quickly

Your situation can change unexpectedly and you might find that you suddenly need to liquidate your asset.

If your money is trapped in an investment that won’t sell, you could end up with less money than you started with.

Generally speaking, there will always be a market for high yielding assets – if the investment was attractive enough for you to buy it, and you’ve received your expected income, you’ll easily be able to find another buyer,

Other articles you may find useful

  1. 8 ways to protect yourself from investment scams

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