How to Evaluate Investments

The Farlex Financial Dictionary (2009) defines the term ‘Investing’ as the act of placing capital (i.e. money or other resources) in to a project or business with the intent of making a profit from the initial placing of the capital. With this in mind, it is difficult to limit investments to specific projects, activities, and business. The very definition of the word investment imply that many projects or activities can be referred as investments as long they are intended to make profits after placing initial capital. Nevertheless, there are some specific projects and activities today that are famous for investors. These common investments include real estates, bonds, mutual funds, trust funds, venture capitals, equities, certificate of deposits, etc.

With these wide arrays of investments options, it is difficult for anyone to provide a universal and clear cut strategy that will work for all investments. The nature and dynamics of these investments options are all different and it is rare that all of them are appropriate for all investors. Nevertheless, despite this difficulty that is present in evaluating investment options, there are some important pointers that an investor must take in mind in order to evaluate and make a smart investment decision.

The first way of evaluating investments is not really evaluating the investment option. Instead, it is the evaluation of yourself (i.e. the investor). This is a very fundamental step since every investor is different. Each investor possesses different goals and necessities in investment. This makes every investment options different when the investors are considered. Some of the questions that you may ask are:

(1) What is your investment goal?

(2) Do you need to extract earnings from your investments?

(3) How much gain do you want?

(4) How much loss can you take?

After asking yourself these questions, you will now have a better chance of evaluating your investment options. This is because there are rarely bad investment options, only ignorant investors and bad investment decisions. From here, you can now shift your evaluation to the more technical aspect of investment. Take in mind that most of these evaluations will be based on the questions that you asked to yourself in your self-examination. For example, one technical aspect that must be taken in mind is the rate and percentage of the return of investment (ROI). Each investment options have their own relative ROI. Some investments are long term while some are short term. If you are an investor who needs the gains in a period of six months or few years, short term investment options are much better for you to choose.

Another important aspect in evaluating investment is the degree of risk that you can take. All investments possess their own risk. If you managed to answer accurately the fourth question above, you will have a better chance of choosing an investment option that will suit your risk tolerance. For example, if your risk tolerance is high, you can take about 30% of losses in your investment for a certain period of time that can also translate in to higher returns in other instances.

These are just some of the few pointers that an investor needs to consider when evaluating and choosing investments. As stated above, there are rarely bad investments, only ignorant investors and bad investment decisions. Losses in your investments can be reduced dramatically if you as an investor will be able to identify yourself to choose the best investment option.


Farlex. (2009). Financial Dictionary. Retrieved January 27, 2011 from