How to Evaluate Future Investments

Don't put all your investment eggs in one basket.

It isn't easy to judge what constitutes a profitable future investment. The old Wall Street adage "The market is out to prove you wrong" often applies to real estate, art and other investments as well. The best you can do is to learn all you can about your various options -- stocks, bonds, real estate, collectibles -- and approach your investments in a rational, fact-based way, using the best professional advice possible.

Instructions

1. Count your money. The amount you have available to invest often dictates the kinds of investments you can reasonably make. For example, $1,000 usually won't buy you any stock worth having, but it can reasonably be used to invest in a money market fund or small collectible that has well-documented prospects for appreciation.

2. Consider your time frame. If you need the invested money back fairly quickly -- anywhere from six months to a few years -- you can't invest in real estate and might want to avoid stocks. The money would be better invested in a money market or CD. If, however, you have decades to wait for appreciation, you can consider real estate, high-yield bonds and stocks.

3. Measure your risk tolerance. If losing every penny of the invested money would mean serious financial hardship for you, invest it conservatively. If, however, losing the money wouldn't spell financial disaster, you can afford to go for investments that have higher risk, but also higher potential rewards, such as growth stocks.

4. Read what leading economists have to say about the economic outlook in general going forward, and especially in the time frame during which you will be investing. This might affect your investment the most, because no matter how solid your individual investment, a prolonged "down" market might prevent it from producing results. Research the prospects in the general industry sector of any stock you plan to buy, or the prospects for any area in which you might purchase real estate.

5. Find out all you can about the investment before you plunk your hard-earned money into it. As Peter Lynch, author of "Beating the Street" advises, "You have to know what you own and why you own it." Another bit of advice: Keep it simple. "Never invest in any idea you can't illustrate with a crayon." For stocks, this means dissecting the company's financial report and learning how profitable it is, how much debt it has, how much competition, and who is running it. For real estate, it means finding out what's going on in the neighborhood around the property, the local zoning laws, and any potential issues such as environmental concerns, crime, or nearby development.

6. Diversify. If your investment budget allows it, buy more than one stock -- and more than one kind of stock -- to spread out your risk. Invest in bonds and money markets as well as real estate. That way, if one investment loses money, you might still make a profit on the others.

Tips & Warnings

• Never invest hastily or out of fear. An adviser who tells you to "jump" on an opportunity quickly or without research is usually a huckster.

References

• "Beating the Street"; Peter Lynch; 1993
• "The Wall Street Journal"; How to Evaluate a Stock; Dave Kansas
• MSN; Money Central; Best Way to Invest $1,000 Right Now; Harry Domash