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Is Investment Analysis the Key to Profitability?

July 30, 2020

Technology has enabled a generation of investors to be at the forefront of an emergent financial market, helping countless individuals to get greater returns through data-driven investment analysis techniques.

Indeed, investment reporting, data tracking and portfolio management are key components for any 21st century investor in an era defined by technology, algorithms and automation.

Often enough, such terms seem scary or too far gone for an individual investor who wants to keep things streamlined and simple. However, the pros of understanding certain principles far outweigh the cons. In fact, it’s likely that your future self will thank you for putting some extra time into understanding your financial decisions

What is investment analysis?

Investment analysis is simply the process of regularly evaluating your investment performance. This could include monitoring your profit and loss, tracking investment expenses like fees, measuring your portfolio’s asset allocation and more.

Why is investment reporting key to any investment strategy?

Today, there are so many tools for tracking and analysing your investments that even the “buy it and forget it” crowd might change their approach.

One of the challenges of having so many options available is that gauging your investment performance might seem tricky or tedious, which is why many investors tend to avoid it. However, there are a number of benefits to regularly analysing your investments that make it well worth the effort.

1. Be less reactive to market volatility

Analysing your investments gives you more context for how they perform over time. This means that you are better prepared for when dips in the market might affect your portfolio, and you can make a more educated judgement about whether to sell an investment or wait it out.

Just consider the March 2020 market crash - many investors sold their assets at the bottom of the crash, only for the market to largely recover within months. Having an understanding of how markets, and individual assets, perform over time makes you less reactive to short-term spikes and dips, empowering you to make smarter investment decisions.

2. Take advantage of opportunities

Becoming more familiar with the typical value of your investments also puts you in the position to take advantage of market opportunities. By tracking your assets’ values over time, you can better gauge what their fair value is. Then, if you see one of your assets is available at a discount, you can take advantage of that as a buying opportunity.

3. Manage risk with diversification

One of the golden rules of investing is to diversify your portfolio. However, even a portfolio that is diverse in the beginning can become less diverse over time, as different assets increase or decrease in value, meaning that your wealth isn’t as evenly distributed across different investments.

By monitoring your asset allocation over time, you can manage risk by ensuring you never have too many eggs in one basket.

4. Understand your financial position

Many people put their heads in the sand when it comes to investment analysis, often assuming that their pension will be enough to support them when they retire. By regularly analysing your investments, not only will you know exactly where you stand financially, but you can use that knowledge to make changes to improve your financial position.

Top investment considerations when analysing your portfolio

When undertaking any portfolio analysis or investment reporting, there are some major points to consider when evaluating an investment that could increase profitability by orders of magnitude. These include considering the risks involved in any investment, the time-frame for an investment, resale value as well as price-data.

Investment risk

In any investment there are both opportunities and risks. Typically, the greater the risk, the greater the potential reward. But of course, nothing is ever so simple. To be a good investor, you must understand both your potential risk and reward, which will allow you to enter into any new investments with your eyes wide open.

A general rule of thumb is that no more than 2% of your portfolio should be invested in any single asset to help diversify your risk.

Investment period

Another important factor to consider is the time-frame of a potential investment. It’s one thing to purchase an asset which you plan to sell in a few months, and another thing entirely to purchase one if the plan is to sell within years.

As we mentioned above, one of the benefits of investment analysis is gaining an understanding of short-term market movements, and being able to make smart decisions as the rest of the market panics.

Understanding when you would like to exit an investment is also helpful, though. If you want to cash in an asset in the next few months or years, this generally means you will choose less volatile markets, as you won’t have the time to ride out short-term volatility. On the other hand, if you plan to hold an asset for 20 or 30 years, then short-term volatility is less of a concern if your analysis indicates that a market will increase over the long term.

Resale value

Another question to consider is whether an investment will have resale value in the future. Suppose that you invest money in an ICO without a whitepaper and no real proposed use-case or new industry solution; the chances are that this investment won’t have a great outcome (for several reasons), including the fact that it’s unlikely that market participants will want to purchase that asset from you.

Analysing potential investments up front can help ensure that you invest in assets that will retain their value.

A data-driven approach to analysis

Notably, these points must be considered within a data-driven framework that could make or break an investment possibility. Important metrics for any financial asset include:

  • Price history
  • Price-tracking capabilities from the time of purchase
  • Percentage gains or losses on a daily, weekly and monthly basis

Such metrics allow you to analyse the performance of your investment while mitigating risks that would otherwise not be obvious.

The bottom line

At the end of the day, investment analysis goes hand in hand with sound portfolio management. Given today’s rapid technological advancements and instant data streaming, you can now track your investments from anywhere at any time at the tip of your fingers, and such features will only improve. Such tools ultimately help an investor to know where s/he stands while contextualising data within a framework that could ultimately help you get to where you want to be in the future.

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