What is an Investment?

An investment is time or money you put into something with the hope of a future gain.

College is an investment in your future. Training is an investment in long-term success. Cities invest in quality-of-life projects and a business might make an investment in product or service improvements.

The bigger question, however, is around what makes a good investment. And that answer is simple, in one way. If you get out more than you put in, that’s probably a good investment. The difficulty comes when you look at the stock market and see hundreds of stocks, along with ETFs, bonds, options, mutual funds, and index funds. You hear about large-caps, small-caps, blue chips, IPOs, and the pink sheets. And then there is value investing, growth investing, aggressive and conservative investing. It’s all so much. Where is an investor to begin?

First, take a deep breath. There are a lot of place you can get good investing advice. Here at Cabot we offer free advice on our website, through our daily investment emails, and through free reports that touch on subjects of interest to beginning and experienced investors alike. We also have membership options where you can get premium research, insights, and advice in the form of exclusive market reviews and summaries, as well as 14 different advisories.

But back to the topic at hand, what is a good investment? That’s a big question. What might be a great stock for one investor might not be a good stock for you.

For example, finding stocks that pay steady dividends is a great way to invest if you want to reduce risk, particularly if you can be confident that the dividends will not only continue but increase over time. Alternatively, if you’re chasing high returns and are comfortable with high risk, you can follow a momentum strategy. However, even a good momentum stock can drop like a stone on a bad day.

At its most basic, however, good investments have some things in common. If a business is fundamentally strong (i.e. it actually makes money), has a diversified product line, and is in a solid position in its market, you are 90% of the way to finding a good investment. The remaining 10% is just a matter of looking at a few parameters – no matter what the company does – to determine if it’s the best stock for your investment dollars.

And don’t forget that the objective is to make money, not to own every good-looking stock in the market. Historically, most successful investors have concentrated their investment portfolios in a few great stocks, and ridden those winners to big profits. That doesn’t mean you should put all your eggs in one basket. Our advice is that, when fully invested, you should own no fewer than five stocks, but put an upper limit at 12 or 15 stocks. There are three main benefits of good portfolio management.

• First, you can keep up with all your stocks, and track what’s happening at the companies.
• Second, you’ll get more bang for your buck.
• A third benefit of a concentrated stock portfolio: You can get in and out of the market more quickly at turning points.

To learn more about making good investment decisions, download our FREE report, How to Invest in Stocks and Other Investing Basics, today.