https://digitalyse.io/how-to-choose-the-best-investment-for-yourself/

time is money

 

“Where should I invest my money?”

If this isn’t the most commonly asked question for new investors, then I don’t know what is.

I don’t blame them either. In fact, I’ve probably asked myself this same question many times over.

After all, in an era of globalization and technological innovation, the average retail investor has increasingly better access to different investment opportunities.

Traditional investment opportunities already present new investors with a ton of headache, like:

  • Should I invest my money into stocks or bonds?
  • Which stocks should I invest in?
  • Should I just invest into index funds instead?
  • What about options or futures?
  • How about mutual funds?

And now, we have a whole slew of new investment opportunities like private equity crowdfundingcryptocurrenciesmargin lendingAR financingecommercewebsite flipping and music royalties.

With more and more investment opportunities opening up for the average investor, it’s no wonder a simple question like this could be so difficult to answer.

 

 

 

And guess what? Asking Google certainly doesn’t help either.

 

When I did a quick Google search for “Where should I invest my money?”, this was the first result on Google:

example of a non relevant google first result

example of a non relevant google first result

First result shown on Google after searching: "Where should I invest my money?"

 

 

This is what the majority of the Google results look like when you search for “Where should I invest my money?”

 

They’ll list out a whole bunch of different investment options and conclude:

 

“Yeah, so feel free to invest in any of these 20 investment options and you should be good to go!”

 

Great! Spent five minutes reading that page and I still don’t know where I should invest my money.

 

So that’s when I started thinking whether there’s a better way you can approach this question.

 

But I’m going to be honest with you right off the bat – I can’t pick the best investment for you.

 

Instead, I’m going to teach you how you can find your own best investment, because the best investment is different for everyone.

 

The Best Investment is Different for Everyone

The reality is, the best investment is different for everybody. It depends on too many personal factors, such as your personality, your goals, your opportunities and your current circumstances.

 

I mean sure, every investor is looking for that ideal investment where the risk is as minimal as possible while the rewards are as high as possible.

 

Suppose you were able to quantify the risk and return levels of each investment opportunity you come across, on a scale of 0-10:

 

Every investor in the world would dream of the ideal investment where risk is 0 while returns are at 10.

 

Unfortunately, that doesn’t exist. The world doesn’t run that way. It can’t run that way.

 

In a relatively efficient market, investment opportunities across the board are going to have a relatively similar risk to reward ratio.

 

That means high return investments will most likely come with equally high risk, while low risk investments will likely have equally lower risk.

 

You can imagine if we quantify the risk and returns for “the average investment”, a high risk high return investment might be 7/10 risk and 7/10 returns.

 

Likewise, a low risk low return investment might have a risk of 2 and a return of 2.

 

So if the ideal investment, the dream opportunity where risk is at its lowest and returns are at its highest doesn’t exist, what do we look for?

 

The next best possible alternative then, are investment opportunities where the risk to return ratio are as close to this ideal investment as possible.

 

We look for investment opportunities that are higher returns and lower risk.

 

This might be something like an investment where risk is at a 2/10 and returns are at a 5/10.

 

But this is what I mean when I say the best investment is different for everybody.

 

If you were a high risk investor, you might not find the investment where risk is 2 and returns are 5 to be appealing, because you want higher returns.

 

In that case, you might be looking for an investment where risk is 5 and returns are 8.

 

Let me illustrate this for you.

 

The Risk Return Matrix

Risk Return Matrix, or Risk Return Ratio

Risk Return Matrix, or Risk Return Ratio

Source: Digitalyse.io

If we had to plot all the different investment opportunities somewhere into the Risk Return Matrix above, we would want investments that are as close to Quadrant 1 as possible, because those are the ideal investments.

 

Quadrants 2 and 3 are the acceptable investments, and the closer an investment is plotted to Quadrant 1, the more attractive the investment is.

 

If an investment had risk levels of 7 and return levels of 7, you might imagine it being plotted somewhere close to the center of Quadrant 2.

 

Now as we said before, the ideal investment (Quadrant 1) is nearly impossible to find, if not non existent.

 

Then the question is, how do you want to approach the next best possible alternatives (Quadrant 2 and 3 investments plotted close to Quadrant 1)?

 

Do you want to approach Quadrant 1 from the Quadrant 2 side or the Quadrant 3 side?

two ways of approaching the risk return matrix

two ways of approaching the risk return matrix

Are you going to approach Q1 from Q2 or Q3? Source: Digitalyse.io

Determining The Best Investment For You

At the end, choosing the best investment depends on your financial goals.

 

Where do you need your net worth to be in 5 years? 10 years?

 

If you have a bit more capital to start with and your goals are a bit more conservative, you’ll probably want investments that are lower return and lower risk – meaning you’ll find investments that are heading towards Quadrant 1 from Quadrant 3.

 

If you have less capital to start with, and your goals are more ambitious, you’ll need to go for higher risk investments.

 

Don’t listen to the financial advisers who might say choosing the best investment depends on your risk tolerance.

 

Because if the investment provides no possibility of meeting your desired financial goals, then none of the planning matters.

 

Of course, however, your goals also need to be realistic.

 

Let’s say you are starting with an initial investment of $10,000 and your goal is to come out with $100,000 at the end of five years, you are going to have to search for an investment that has a return on investment (ROI) of approx 60% per annum. 

 

Are you able to find an investment that can consistently generate you 60% returns per annum?

 

Maybe, but very unlikely.

 

But what if you’re looking to just double the initial investment of $10,000 in five years? Your goal is $20,000.

 

Using the Rule of 72, we can calculate that the interest rate we need to double our investment in 5 years is a 14.4% return on investment per annum.

 

That’s looking more realistic.

 

Now, knowing we need a minimum 14.4% ROI per year, we can go by process of elimination to take out any investment opportunities that do not meet our financial goals.

 

Bank savings account, mutual funds, bonds, GICs, etc are all investments that do not meet our financial goals. Cross them off your list.

 

With many options crossed out, we’ve made our job a lot easier comparing just the risk and return levels of higher risk investments like private equities, public stocks, alternative investments, and leveraged real estate.

 

More on this in an upcoming blog post but you can see that it’s become a lot easier to decide what to invest in.

 

We’re now left with 4 investment opportunities (instead of the 20 you saw on every other Google search result) where we’ll do further research to see which investment opportunity will yield the best risk to return ratio.

 

Or maybe you might choose to invest in all 4 – obviously, diversifying is equally important!

 

We hope this article provided more insight on how you can choose the best investment for yourself! If you have any additional questions or feedback for us, please leave a comment down below and we’ll be happy to answer as soon as we can.