Before embarking on an investment, it is useful to ask yourself a certain number of questions in order to limit the risks of errors and financial disappointments.
Question n ° 1: What am I buying?
The first question for an investor to ask is simple but essential: what type of investment product am I buying? (Is it a stake in the capital of a company (share, crowdequity)? In this case, I will own part of the company and the profitability of my investment will strongly depend on the growth of this business, which depends in particular on the economic situation. Is it, on the contrary, the financing of a debt (bond, classic crowdfunding)? In this case, I will be the owner of a financial security with a fixed yield which will not bring me back more if the company is doing better. Is it finally a share of funds (UCITS, FCPI, SCPI) managed by a specialized management company?
Question n ° 2: What return can I expect?
The question of the expected return is useful for two reasons: on the one hand, it makes it possible to compare different types of investments, on the other hand, it can be used to set a resale objective, in particular on the equity markets. With regard to fixed rate investments (regulated passbooks, euro life insurance funds, bond markets, crowdfunding), the return is known in advance by the investor who can compare them to choose the most remunerative. Please note: the most profitable investments are generally the most risky.
Many other asset classes do not offer a fixed return (equities, private equity, crypto-currencies ), and the investor can only estimate the future upside potential here. In this case, it may be useful to set a performance objective to be achieved beyond which participation in investment will be resold. For example, it may be rational to set a target price to achieve when investing in equities, and to stick to it.
Question 3: What are the risks of loss?
Going hand in hand with the question of the expected return, the investor must also ask himself the question of the risks of an investment. Can the investment lose 10%, 30%, 50% in value, or even more, in the event of a dark scenario? Is it possible to lose all of the invested capital and under what conditions? This question is also inherent in the volatility of each asset class: the more volatile an asset class, the riskier it is. We can thus globally classify the different asset classes by level of risk as follows (from the riskiest to the least risky): crypto-currencies, private equity, crowdfunding, listed shares, UCITS, SCPI, bonds, funds in euros of life insurance, regulated passbooks.
Question n ° 4: What is the activity of the company that I finance?
Once past the questions related to the type of financial product that you buy, the first question to ask yourself is that of the activity of the company in which you invest, both when it comes to buying actions than participating in a crowdfunding campaign for example. It is indeed important to understand where you put your money. For an individual, it is naturally impossible to know the company in detail in order to estimate its growth potential in the short or long term.
Nevertheless, it is useful to try to understand in which sector the company is present, how it manages to achieve its turnover and whether or not it manages to generate profits (which is generally only known for listed companies). Very concretely, an investor should avoid investing in a company which he does not understand the way in which it manages to make money.
Question n ° 5: What is the risk of bankruptcy of the company?
In the logical continuation of the previous question, the investor has every interest in trying to understand whether the company in which he is investing presents a risk of bankruptcy. It is often very difficult to answer this question, but a few simple reflexes can help answer it. Are there any known competitors who have also gone bankrupt? Is the company cited in the media as having serious legal or financial problems?
Question n ° 6: Am I participating in a speculative bubble?
Many individuals can be pressured into investing on a whim to “ride” a market trend they have heard of. In recent years, for example, the subject of crypto-currencies has developed, and in particular Bitcoin. Be careful to learn about the functioning of these markets and find good reasons to invest your money there to avoid participating in simple speculative bubbles. Historically, equities have been one of the asset classes most prone to speculative bubbles. In a period of low interest rates, bubbles are likely to appear in several asset classes: it is therefore advisable to be vigilant.
Question n ° 7: Can I trust the platform that organizes the investment?
This question arises for investments organized through a centralizing platform, particularly in the field of crowdfunding and ICOs.(cryptocurrencies). It is particularly important to verify the reliability of the selection criteria for investment projects selected by the platform. In USA, crowdfunding platforms are subject to AMF rules and generally apply a very strict selection process in the choice of projects they propose to finance, which in principle eliminates the risk of scams. On the other hand, we must remain vigilant with regard to platforms active abroad, which may be subject to much weaker control rules, especially in the area of ICOs where regulation remains non-existent at present.
Question 8: Is my investment ethical or useful for society?
This is a question that investors did not ask themselves ten years ago. In a context of awareness of current environmental and societal challenges, the search for socially responsible investments has now increased. More and more investors are choosing their investments not only according to the return they expect, but also according to ethical criteria. Sectors which pollute (petroleum, heavy industry), which damage health (tobacco), or which may be the subject of strong controversy (banks) are thus generally eliminated from the investment spectrum. On the contrary, companies linked to sustainable development are favored.
Question n ° 9: Am I well diversified?
After having made several investments, the question of diversification should be asked. Have the different investments been made in a single asset class? If so, what other asset classes could be suitable for better risk diversification? Indeed, it is important to ask the question of the correlation between asset classes in order to reduce the overall risk taken by the investor, without necessarily reducing his long-term return. Above all, it avoids suffering a very large loss due to a single bet on an asset class in bad shape or on a bankrupt company.
Question # 10: How will my profits be taxed?
This last question is essential to optimize investment. The taxation of profits can indeed modify the interest of investing in certain classes of assets. Historically, in USA, it has long been fiscally unattractive to invest outside of a PEA or life insurance, which has in particular limited the interest in investing in crowdfunding or in American equities held in direct. From next year, the “flat tax” wanted by Emmanuel Macron should align the taxation of many investments and now make attractive investments that were not so far.