You are working. You have savings. Now, you want to take out your savings in the bank and take it somewhere else to grow it because the bank is only giving you a measly interest income. There are a lot of available options. There will be people offering you investment programs.
The stock broker will tell you that real estate is good because it appreciates in value over time. The insurance agent will tell you that investing in insurance is good because you need to insure or protect yourself because yourself is the most important asset.
The jeweler will tell you to invest in gold jewelries because gold will appreciate its value over time and a good safe haven against a bear stock market. Moreover, your friend will approach and convince you to invest in cryptocurrencies like bitcoin because he has already reaped very good returns in just a span of 2 years.
The question you might have is which is which? Where will you put your hard-earned money? The answer is you need to evaluate each investment according to your objective, risk, return, and liquidity.
What is your objective?
How much money do you need? Define how much you need depending on the purpose where will you spend it.
Where will you use it? Is it for a capital in a business? Is it to buy a new car or a new house? Are you planning to have a vacation? Are you planning to get married in the next 5 years?
Each of us has a different objective.
Risk
Risk is the possibility of losing the amount you invested or the chance that your money will not be returned to you. In assessing risk, some of the most important points to consider are the following:
1. The kind of investment you made. “Did I lend the money or invest it? If I invested in a business, am I an owner and partner in the business? This has to be clear before you give your money to anyone.
2. The issuer or the entity which will use your money and will pay you the return. “Is the issuer reputable? What is the track record for managing the investment? If it’s a business, is the owner good in managing his finances?”
3. The kind of business for which the money will be used. “What kind of business will the money be used for? How does the business or investment generate money? Does it have a sound basis for earning income?”
Generally, as the risk-reward concept of investment tells us, the higher the return of the investment, the higher the risk is.
Return
Return is simply the efficiency of your investment and it’s time-bounded. In finance, this is more commonly known as ROI or Return of Investment.
You hear the common terms ‘ROI in 1 Year’ or ‘ROI in 6 months’. This simply means that your original principal investment will be returned after 1 year or 6 months.
To compute for your return, simply follow the formula below:
Total amount received at the end of the period minus amount invested = ABSOLUTE RETURN (expressed in your currency)
Total amount received at the end of the period divided by amount invested minus 1 = PERCENTAGE RETURN.
Generally, the higher the return or ROI is, the more favorable that investment is. And the earlier the ROI is, the more favorable that investment is.
Liquidity
Liquidity is the characteristic of investments that you can easily turn it back to cash. This is basically dependent on your needs. If you foresee that you might have immediate cash needs in the near future, then invest in liquid assets.
Liquid assets mean investments that are easily convertible to cash. Generally, the more liquid the investments is, the easier it can be converted into cash. This is where the saying ‘Cash is King’ prevails.
In assessing liquidity, you can ask the following questions to yourself:
1. How fast can I turn my investment into cash? Can I find a ready buyer for it just in case I needed an emergency cash?
2. What’s the quick sale value of my investment? This is the value if you want to easily convert it to cash.
