Firstly, we’re going to assume that you’ve done your due diligence on the investment in question.

If it’s property, then that’s looking at what has sold recently in the area and making sure you pay below market value if you can. If it’s a company you’re investing in, it’s examining their published accounts, their competitors, the projections for their market and at the external economic factors that might damage your investment.

We’ll also assume that you understand exactly who you’re dealing with. You know why they’re offering you this opportunity, and what they stand to gain – or lose – by your involvement, or lack of it.

Finally, you also have a clear idea of your own position – essentially what you can commit financially to the investment. You know if you need to borrow money to do it, and whether lenders are willing to back you.

Those are the basics. But what’s next? Here’s what the team at Holborn Assets thinks.

Going deeper with risk

Properly understanding risk is absolutely crucial. Firstly, this is about understanding how much risk you feel comfortable with – again, a basic starting point for any investment decision. But beyond this, you also need to assess exactly what kind of risk the investment represents. (Because there is no such thing as a zero-risk investment, there will always be some level of jeopardy, no matter what people tell you).

So, before you make your decision, understand that there are two main types of risk, and many different kinds within each. Market risk includes all those things that could affect the market your investment operates in – everything from political turmoil and climate change to sanctions or cheap imports flooding the market.

Specific risks, meanwhile, are things that will directly impact only the company (or property) you’re investing in – maybe an ongoing investigation into wrongdoing that could result in a future fine, or an influential leader who is about to leave. Other risks include liquidity risk – when you’re unable to buy or sell your asset when you want to, and exchange rate risks – something that’s obviously particularly important if you’re investing abroad. The bottom line is that risk is not straightforward – it comes in many shapes and sizes and it’s crucial you understand what kind you’re dealing with.

Seeing the bigger picture

One of the most influential American investors of the 20th century, Philip Fisher, said this – and we think this advice still holds true today.

“I believe strongly in diversification. I do not believe in over-diversifying. My basic theory is to know a few companies (seven or eight) and know them really well – and be sure your diversification is real diversification.”

But what does this have to do with your investment decision-making process? Well, this: that when you’re looking at any opportunity you need to understand exactly how it fits in with the rest of your portfolio. And when we say ‘you’, we really mean it. Fisher also strongly believed in doing his own financial research, another habit we’d encourage.

So, take a look at the stock you’re considering investing in. Does it operate in a similar area to many of the other assets in your portfolio? What markets do they sell into? Do the market and specific risks that face your existing assets also face the one you’re considering? Again, building a compact, but diverse set of investments is key to longer term growth.

A final word

So much of business is about relationships, and of course investing is no different. Whether it is with your financial advisor, a business partner or your bank manager – relationships matter.

But while that’s true – we’d always say seek the investment advice of those you trust – don’t just invest because they say it’s a good idea. Do your own homework, ask yourself if it all feels right on a personal level – and then ultimately trust your own judgement based on as much information you can gather.