There is no doubt that if you asked this question of a number of people you are probably going to get a variety of responses. For instance, one person may favour investing in property, a second in stocks and shares, a third in gold and another in an ordinary building society savings account.
In generic terms, you could say that a good investment is one that provides you with what you consider to be an acceptable rate of return either in the form of capital growth, income or a combination. However, what you consider to be a good return on the money that you have invested may be very different to the expectations of someone else.
For instance, whilst not in any way wishing to “pigeon-hole” people, someone that has retired, that can live comfortably off their retirement income and has more than enough capital to meet those unexpected bills as well as pay for a couple of holidays each year may be quite happy to leave their surplus capital in an interest bearing instant access savings account. The fact that the interest that they are earning is not presently keeping up with inflation may be of no concern at all to them.
However, you could have somebody else that is single, middle aged, whose income more than covers his or her household expenditure that has just inherited a substantial sum of money. They may prefer to invest the funds in equity based investments for capital growth and, perhaps because they had not been expecting to receive these funds, are quite happy to take a high level of risk in the hope that they will achieve a greater return than by just leaving the funds in a savings account paying a low rate of interest which they may not have found appealing.
A financial adviser may argue that a good investment is one that meets the client’s investment objectives taking into account such things as their risk strategy, term, whether they require growth or income or perhaps a combination of both and tax status. On the subject of risk, it could be argued that a good investment includes an element of diversification that spreads the level of risk even further.
For instance, just because a client wishes to invest for growth and take a medium level of risk, does not mean to say that they cannot consider a combination of low, medium and high-risk equities. In doing so, collectively, it could be viewed that their portfolio is a medium risk. Furthermore, included in that portfolio, could be a spread of stocks and shares across global markets as well as different sectors providing greater diversification.
Another person could view direct investment in rental property as the best form of investment despite the drop in property prices that was seen here in the UK a number of years ago that may put somebody else off this type of investment. Yes, the value of their property portfolio may have dropped back then but it may have recovered in recent years and now be worth more than they had originally invested and providing them with an ever increasing rental income.
So, as you can see, what is considered to be a good investment for one person may not necessarily be the case for someone else. Isn’t it fortunate that, with so much choice available, most people have the potential to find what they consider to be a good investment?
Charles Freeman is a financial writer who studies the world of finance daily. His current research project is the assessment of investment tools from companies like Profile Software for the management of high performance investment.