Describe the factors that need to be considered before making an investment.

Running a company requires making various decisions — some of them being more important than others. Every entrepreneur must tackle two crucial elements: how much money they are willing to invest and what projects they decide to put their funds into. Answers to these questions often shape how well the organization fares on the market, determining its future.

The key to making a good investment, among other things, is gathering enough funds before you even think about going through with your investment plan. While individuals can rely on opportunities like pre settlement funding to get cash quickly, firms have limited options in this regard. As a result, it is worth creating a financial roadmap before making an investment decision.

Other beneficial practices include learning more about asset allocation, establishing your goals and risk tolerance, creating an emergency fund, and determining your future needs for capital. Here are some critical factors that you should consider before investing:

Your Current Financial Situation

The first step of the decision-making process is analyzing your current financial situation. It would be best if you had a clear idea of your income, debts, assets, and expenses before looking into investment opportunities. It will give you a better sense of how much money you can afford to put into an investment.

For a company, the financial situation is often the most important factor in determining whether it can make an investment or not. Moreover, most entrepreneurs have to be aware that their personal funds might be used to fund their business ventures, especially in the case of company’s problems — which is why they must carefully analyze their own current financial situation.

It is best to have a few thousand dollars at your disposal before starting investing. It’s also worth considering how you will handle cash flow if you run out of money.

Also, it would help if you considered your short-term and long-term financial goals. What do you hope to achieve in the next five years? What about 10 or 20 years down the line? Once you have a clear idea of your goals, you can start looking for investments that will help you achieve them.

The Risks Involved

No matter what you are investing in, it always involves some level of risk. The more significant the potential reward, the greater the risk typically is. It is essential to be aware of all the dangers associated with your venture and have a clear picture of them in your mind whenever you make even the smallest decision.The best way to start is by looking at possible problems that can occur and then thinking about ways to mitigate them. What are the chances of the investment not paying off? How likely is it that you will lose all of your money?It would be best to consider the risks specific to the investment itself. For example, investing in a new company is riskier than investing in an established one. Similarly, investing in a company that is not doing well financially is riskier than investing in a company that is doing well.It may be difficult to assess the risks at first, but you should try to get as much information as possible. This can come from financial statements, industry reports, or even conversations with experts who have experience in the field.

Your Risk Tolerance

The next thing you need to determine is how much risk you can take. It is not just about being willing to take a loss on your investment but also about being able to tolerate losing money at all.

Some people are more risk-averse than others and can only invest in relatively safe investments. Others are willing to take on more risk in exchange for the chance to earn higher returns.

There is no right or wrong answer here. It all comes down to your personal preferences. Just make sure that you invest in something that you are comfortable with. Otherwise, you may end up losing sleep at night worrying about your investment.

The Potential Returns

One of the most important factors to consider when making an investment decision is the potential returns. How much money do you stand to make if the investment pays off? Is it worth the risk? These are vital questions to answer before making any decisions.Assets tend to have certain returns; accordingly, each organization should establish a target return rate and determine whether it is viable or not. Since this process can be pretty complicated, it is advisable to use the help of professionals.Keep in mind that there is no such thing as a sure thing when it comes to investing. Even the safest investments come with some level of risk. As such, it is crucial to set realistic expectations for the potential returns of your investment.

The Costs Involved

Investing always comes with some costs. For example, you may have to pay broker or advisor fees. There may also be taxes that you have to pay on your profits. It is important to factor these costs into your decision-making process.When coming up with a budget for your project, you should take into account all of the associated costs. Otherwise, the project may turn out to be more expensive than it initially appeared, leading to serious financial problems in the future.

Final Thoughts

To conclude, there are many things to keep in mind and several factors to consider before making an investment. The best strategy is to take your time and analyze all available information.Investing is a complex process and can be tough to do on your own. However, the rewards are well worth it. The world of investing will never cease to amaze you.

This guide has covered everything you need to consider before making investing decisions. If you take the time to do your research and understand the risks involved, you should be able to make sound decisions that will help you achieve your financial goals.

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Posted - 05/24/2022

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Describe the factors that need to be considered before making an investment.

There are a number of factors to take into account whether you are planning and managing your investments yourself or getting professional advice.

We consider five key factors when undertaking investment analysis for our clients.

These are:

1. Compliance

2. Liquidity

3. Volatility

4. Cost & Value

5. Return

Perhaps surprisingly return is not top of the list; it is the one we consider after the other factors.

In this article we discuss these issues and how we manage and analyse investments to help optimise solutions for our clients.

At Black Swan Capital, we are more focused on our clients’ long-term goals than short term flavour of the month investments or asset classes. Naturally we take into account macro-economic (government policy on interest rates, tax, exchange rates etc) and micro-economic (people, businesses, supply& demand, market performance) variables, market cycles and other influencing factors, when assessing our clients’ objectives, central to our recommendations.

An important component of holding an independent license as we do, is that we make sure we have considered a suitably broad range of investment solutions from the available universe. For greatest efficiency we do this through our centralised Investment Selection Committee.

Once an investment has made it through the Investment Selection Committee, we once again assess it by these 5 factors to determine its applicability to a specific client’s needs.

We will discuss these 5 components further.

1. Compliance– it may seem obvious that a potential investment is compliant, and from an investment committee perspective it is. However, what is compliant and appropriate between one client and another can be variable. For example, an investment structure that may be appropriate for a British person living in the Benelux, might be inappropriate or non-compliant from a tax perspective for a US person living in the same place with similar needs. This reinforces the importance of tailoring and individually assessing recommendations for each and every client.

If a potential investment cannot pass the compliance test, there is no point in considering the other factors, it is rejected.

2. Liquidity– We believe this is one of the most important factors for all international and expatriate clients. One thing we have observed repeatedly in decades of looking after clients, is that life changes! This is particularly true for expats. If you are living outside your home country, whilst people are tending to stay longer, particularly in European countries, there is a chance you will move on to another location, or back home. The timing of this can sometimes be sprung upon you. Therefore, we do two things.

One, we make sure there is a high level of portability, so you do not have to liquidate your investments if you move. For the most part, you should be able to continue your investment plans and take your investments with you.

The second thing we do is make sure you always have liquidity. This means if there is an emergency, you can get your hands on your funds, without penalty or undue delay. In the past, many investment structures would lock people in for up to 20 years and if they tried to access their money, they would be heavily penalised. We believe these structures for the most part, are not appropriate for most modern-day expats and so we always ensure that you have the security of liquidity. It is an important factor that should not be overlooked.

3. Volatility– We follow the philosophy of taking on the lowest level of volatility or market risk required to achieve our clients’ objectives. As we discussed in previous articles, volatility or risk is not bad per se, it is essential to generate returns on investment. What we are ensuring is that the client is not taking on more than they require to achieve their goals. How does a particular investment correlate with the person’s personal risk profile? And how does that investment compare with its peers? These are factors we consider when assessing investments for each of our clients.

4. Cost & Value– the cost of an investment is obviously important but many of the costs can be hard to understand. You should always look for the OCF or TER (the OCF is the Ongoing Charge Figure which is the replacement term for TER, which meant Total Expense Ratio). This is the total cost of an investment. We prefer investment structures that can take advantage of wholesale pricing and cost-efficient underlying investment structures. This can result in relatively lower costs of management which is passed on to you, the investor. Lower cost translates in higher returns and you achieving your goals.

It is not as simple as cheaper is better. We differentiate very clearly between cost and value. In undertaking our analysis, cost comparisons of otherwise very similar investment structures can result in significant savings, which translate as higher net returns, for our clients.

5. Return– Performance is not just about top line return, it is about how you achieve that return. Ultimately it is net return that you generate: your investment performance returns less the costs of creating those returns. Similarly, when considering returns, it is important to see how the returns were generated, relative to risk adoption. We need to ensure the potential investment performs well in absolute terms and in relative terms both in a performance ranking and also performance for a given volatility level. Of course, you also have to consider the restrictions, and an investment that may generate strong returns, but which requires money to be locked away for extended periods, compromising your liquidity, may not be worth it.

Considered together, we make informed and smart investment recommendations that can meet your needs and allow for contingencies. That is, good net returns and peace of mind.

Whether you are managing your investments yourself, or wherever you are receiving support and advice from, we encourage you to follow a process of comprehensive research and analysis to make sure it is really right for you.

If you have existing investments in place, we are happy to review these for you to make sure you are in the optimal structure and that your investments are working for you. Feel free to contact us to get a review on your existing investments. As always we welcome any questions, you can contact us at [email protected].