Investment Valuation: Return, Risk, Liquidity


Ok, as I have mentioned earlier, you need to invest to fight inflation. But before you invest, you need to evaluate your investment to which you will put your hard earned money. You need some investment valuation. And this can be done by evaluating three important concepts: RETURN, RISK and LIQUIDITY.

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. An ROI of 6 months is more favorable than an ROI of 1 year. And an ROI of 20% is undeniably more favorable than an ROI of 10%.

 

RISK is another factor in investment valuation. It 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, the higher the return of the investment, the higher the risk is.

 

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.

So before you invest, assess yourself first and your investment. RETURN, RISK, LIQUIDITY.

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Tyrone is a passionate financial literacy advocate. He started this blog on November 2008 when he watched The Secret which talked about Law of Attraction because he wanted to become a millionaire and wanted to know how a millionaire acts. At the age of 26, he achieved his first million. To find out more about him, click here or follow him at Instagram

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