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Investment decision-making process

Updated: 6 days ago

Before investing, inform yourself and evaluate your willingness to risk and objectives, make your investor profile.

What does the investor's choice depend on?

The choice of the instrument will depend, almost always, in other aspects on:

  • The investor's objective

  • The amount available to invest

  • The desired profitability

  • The degree of risk aversion or tolerance of the investor

  • The period in which you want to make a profit

For example, a person who saves for the long term and does not want surprises will favor debt instruments, such as time savings accounts. Now, if the amount warrants it, and if you are willing to assume a higher level of risk, you could invest your resources in a mutual fund of medium and long-term debt, in a mutual fund of capitalization instruments or shares.

In any case, no one can tell the third party with certainty where it is better to invest, basically for two reasons:

  • Nobody knows the future

  • No one knows a person's needs better than herself. The best example is the different levels of risk that people are willing to take.

For those with a high tolerance for risk, the most recommended instruments are capitalization instruments, such as stocks.

It is always advisable to diversify the investment if you have the resources for it and know the characteristics of the instruments in the market. If not, getting expert advice may be the best option.

There is always more than one option to invest in.

Aspects to consider when investing

1. Investment objective

You must know why you want to save or invest or put off your consumption today, for the future, to go on vacation or buy a car.

2. Tolerated risk level and desired profitability

You must evaluate your tolerance level to changes associated with the price of assets versus what you expect to gain from the investment.

For example, an investor with a low level of tolerated risk would probably not invest in stocks given the volatility of their price, even though, in this way, they could obtain a higher return. The level of risk tolerated is a characteristic of each person and the investment objective.

In this sense, it is relevant to know that there are instruments with different levels of risk and, therefore, different levels of associated profitability. For example, an instrument issued by the Central Bank is less risky, but the associated profitability is lower than other investment alternatives.

3. Investment liquidity

It is the degree of convertibility of the asset into cash without affecting its value. This variable is associated with when you want to withdraw the investment.

As in the previous case, it must be borne in mind that there are instruments with different degrees of liquidity.

As an example of high liquidity, we can cite the shares traded on the stock market, and that has a stock market presence. If the share has high liquidity, the sale will probably be made at the value it is quoted.

The shares of investment funds have been less liquid if we consider that the liquidity of these shares is related to the greater or lesser speed with which an investor can buy or sell this instrument, keeping the market price.

4. Investment terms

It is a variable that is directly associated with the investment objective.

5. Intermediate flow needs

It refers to the need for periodic flows or not that the investor has. In this regard, it should be noted that there are instruments that pay intermediate flows, others unknown, and others only at the end (Examples: mortgage bills, stocks, zero-coupon bonds, or fixed-term deposits).

For example, if the investor invests in stocks and wants to receive cash flows, he should choose the company that contemplates a stable dividend policy.

6. Market access

It refers to the possibility of buying or selling an instrument in the primary and secondary market. In the first, there are restrictions on the transaction, for example, the sale of promissory notes by the Central Bank. In the secondary, there are restrictions by amount; for example, brokers require a minimum capital from the investor to access the stock market.

7. Units of value and readjustment

The unit in which the instrument is expressed can be UF, IPC, US $, etc.

According to their requirements, an investor can choose one type of readjustment instead of another.

For example, an exporter who must pay in dollars may want to invest in that currency to protect yourself from exchange rate fluctuations.

8. Costs associated with the investment

To carry out certain investments, on certain occasions, it is necessary to incur a financial cost; for example, when investing in a mutual fund, remuneration must be paid to the management company and, in certain cases, a placement commission.

Another example is stockbrokers., which charge commissions for securities brokerage.

9. Taxation of investments

It is important to analyze the tax to which the income generated by investments is affected and the tax benefits that these grants.

10. Safeguards and guarantees

Some instruments have specific payment guarantees if the issuer cannot meet its obligations.