Investing

3 tips for making smart choices when picking investments

Twenty/20

The markets are back near early 2020 highs after being devastated by the coronavirus pandemic in February and March. But trying to suss out a winning, or "good" investment is much more difficult than most people think — whether you're trying buying gold, oil futures, or stocks.

"People have had some big wins" picking stocks over the past few months, says Justin Halverson, a financial advisor at Minnesota-based Great Waters Financial. But at the same time, others have experienced sizable losses — which is what makes gauging the markets and making strategic, short-term investments so difficult, he says. "The problem with timing the market is that you need to know when to get in and get out."

Most people expect a return when investing their money. But investing always involves some level of risk — and experts say that if you're planning on investing in a specific company, sector, or commodity, you need to do your due diligence. Otherwise, you could fall prey to "investing FOMO" and make a rash decision that loses you money. 

"If you're taking a lackadaisical approach to an investment," says David M. McInnis, principal and co-founder of investment advisory firm East Paces Group in Atlanta, "I'll tell [the investor] this: 'Don't make the investment.'"

The problem with timing the market is that you need to know when to get in and get out.
Justin Halverson
Financial advisor, Great Waters Financial

As for how investors can make sure they're doing their due diligence before making any kind of investment, experts say you start by making sure you have all of your financial bases covered, you know the risks, and that you've done your research.

Before you make any moves: Make sure you're diversified

When you're starting out with investing, most financial professionals suggest you invest in the market itself with products like index funds and ETFs — a strategy also championed by Warren Buffett. Those tend to be low-cost and let you spread your money across a variety of assets and companies.

Only once you've built up that diversified portfolio should you consider picking individual stocks or investing in precious metals, Halverson says. Even then, those more complicated investments should be just a small slice of your portfolio.

"In general, you need to be diversified. You can't put too many eggs in one basket," he says. With a diversified portfolio, you mitigate the risks of taking an outsized hit if the markets decline again. And if your new investments don't pan out the way you had hoped and lose value in the short term, most of your portfolio should still be in decent shape.

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Understand the risks and your tolerance for them

Again, all investments have risks. But McInnis says that some investments are inherently more risky than others, so before you decide to buy a stock or purchase another product that you may not fully understand, it's important to do your homework: Research the investment thoroughly.

For example, earlier this year, oil prices dropped to record lows. Many investors purchased shares of an oil futures ETF, USO (United States Oil Fund), to try and capitalize on that, but without understanding that the ETF comprised futures contracts and not physical barrels of oil. While prices have since recovered a bit, many investors lost their nerve after seeing their investments lose value, sold their shares, and locked in their losses.

You would also want to think about if you'd have trouble stomaching a precipitous loss in value if things go awry.

"Looking at your risk tolerance is important," says McInnis. "Don't take more risk than you're comfortable with." 

Research potential investments

Researching investments, particularly stocks, isn't easy. But if you want to try and get a rudimentary idea of a stock or fund, McInnis suggests you get comfortable diving into the data.

"Start at the top," he says, by looking at how much money a company is making, how much it expects to make in the future, and consider how long the company has been around.

"Look at revenue growth metrics," he says. "Really try to determine what the historical growth of a company's revenue has been, and do what you can to figure out what it'll be in the future."

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As for a company's age, McInnis says newer stocks, like companies that have recently gone public, can be riskier. While many of those newbies generate headline-making returns, research shows that most investments in newly public companies lose money after five years. 

"As a company gets older, bigger, and matures some, then costs come out of the equation and profit margins increase," he says. McInnis adds that many trading platforms also publish research and analysis into specific stocks and sectors that users can access, often for free.

Take a step back and make sure that a stock or fund you're interested in purchasing aligns with your values and strategy, Halverson says, and that you're comfortable with the size of your investment. "Ask yourself how it fits into your overall investing strategy and philosophy."

Finally, if you're not confident that you fully grasp the nuances of a potential investment, both McInnis and Halverson say you should talk to a professional for advice. And McInnis says, "Go to a company's annual filing" before making any financial decisions. "If you're serious about investing, get their 10-K and read it."

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