Manage Risks When Investing By Asking This Simple Question

Posted by under Investing . Published: May 29, 2019

In online forums and Facebook groups, I’d always read several people asking if it’s okay to invest in a certain company or a particular investment.

The goal of the one asking is to know, first, if the company is legit and not a scam; and second, if the investment will give high returns.

You won’t always read about these companies and investment opportunities in the news. But it doesn’t mean you can’t do some basic research online.

And as what many have already been doing, crowdsourcing information in social media is an efficient way to learn more about the legitimacy of the company and the investment they’re offering.

The first question I always ask

Whenever someone asks me about these companies, or if someone is trying to offer me an investment, there’s always one question that I ask first.

“How old is the company?”

This question has been effective and useful as an initial test for investment crowdfunding companies, which has been appearing out of nowhere left and right recently. I encourage you to ask this whenever you encounter a new investment opportunity.

In general, the age of the company is directly related to how risky the investment is. So if the company is young, then it is high-risk, which then prompts me to ask whether or not I’m willing to invest in a high-risk venture.

To give you a simpler and better understanding of why I ask this question. Here’s how you can manage your risk after you learn the year when the investment company started.

investment risk

On company age and investment risks

LESS THAN 2 YEARS OLD
If the company is less than 2 years old, then it’s an ultra high-risk investment. So in this case, I should only invest money that I can afford to lose.

This is exclusively just for my “extra money” — cash that I have which has no solid purpose and idly sitting in my bank account, waiting to be spent.

If I don’t have that extra money, then I simply pass up on this opportunity. I don’t need to do further research anymore, and just move on.

However, if I do have that extra money, then I go ahead with my due diligence next. This is usually scam territory, so I’m always careful before investing, and make sure everything about them is legit before putting my money on them.

2-5 YEARS OLD
If the company is more than 2 years but less than 5 years old, then it’s a high-risk investment. For this case, aside for my “extra money”, I can also invest my funds, which I’m reserving for not-so-important financial goals.

Let’s say that I’m planning to go on a 2-week European tour a few years from now, and I’ve already saved some money for it. If I encounter an investment opportunity from a company that’s 2-5 years old, then I’m open to putting my travel fund there.

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The worst case scenario is that I lose all my money, which won’t be a financial disaster because it’s just for my vacation goal.

However, if I’m saving up for my child’s college education, which is of course, an important financial goal, then I will not invest my money in it because the company is still young, and the risk is unacceptable to me.

5-10 YEARS OLD
If the company is more than 5 years but less than 10 years old, then it’s a relatively moderate-risk investment. The company is less likely to be a scam, so I’m more confident that my money is safe with them.

When it comes to these companies, I’d be willing to invest funds that I have for my long-term goals. Or simply, money that I plan to spend or use far into the future, around five or more years from today.

Why? Because if the worst case scenario happens and I lose my money, then I will most likely still have enough time to work, earn, and rebuild my fund.

MORE THAN 10 YEARS OLD
Finally, if a company has been operating for more than 10 years already, then I will feel relatively safe at investing with them. There’s a low chance that you’ll end up losing your money (but remember that it can still happen).

Given their stability and historical performance, I’m confident with putting money on whatever investment opportunity that they have to offer.

But, it’s still important to do due diligence and determine their legitimacy, and find current investors to ask about their investing experience with the company.

manage risk

Asking the age is just the first step

Using the age of the company to manage your risk is just the first step when choosing investments. It is a great way to immediately determine if you should just simply back out or go ahead and get more details.

The decision mainly depends on the type of funds that you have. Is it just extra cash? Or is it for a specific financial goal? Remember to never take on risk that you can’t manage.

The next step, in case you’re interested to pursue the opportunity, is to do due diligence. Make sure that the company is legally registered and has a license to solicit investments.

This is particularly vital for companies that have no mention in the news. It may be exciting to discover a new and great investment opportunity before others, but be sure that you’re not simply being fooled into putting money into a clever scam.

Moreover, it’s worth mentioning that you should never invest on something that you don’t understand. Learn how exactly your money will grow, and see if their financial projections and stated potential returns are possible.

And finally, even if everything checks out, your financial goals will still dictate if you should invest or not. Because investments are simply vehicles that you use to bring you to your destination.

Always run the numbers and see if the investment does have the potential to help you achieve your financial goals. And if you’re unsure how this is done, then perhaps you can seek the help of a financial planner or investment adviser.

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