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5 Ways to Recognize a Good Investment Opportunity

We all know the basic tenant to successful investing: Buy low and sell high. But this common adage can be difficult to implement, especially when many of your friends and colleagues are doing the opposite. Consider these strategies that will help you identify good investment opportunities and use them for your financial advantage:

[Read: What to Do If Your 401(k) Plan Has High Fees.]

Buy low. Figure out the baseline value for an investment or purchase, and wait to buy it until the purchase price is below what is reasonable. When the stock market drops and other people are panicking and selling, that is the time to look for buying opportunities. Ideally you want to purchase an asset after the price falls significantly, with the expectation that it will rise again in the future and produce a nice return.

Sell high. The time to consider selling an asset is after the price rises dramatically. This is often a time of stock market growth when many people are eager to buy into a rising market. When an investment shows significant gains, this is the ideal time to cash out and lock in your return. You could tuck the income into a safer investment or look for a new underperforming asset to try to repeat your success.

[See: 10 Financial Perks of Getting Older.]

Learn from the storms. While trying to buy low and sell high, you are bound to make some mistakes. If it were easy to buy low and sell high, everyone would do it. When you lose money on an investment, try not to lose sleep over it or give up investing altogether. Perhaps you want to take a break from active investing for a while and capture market returns with an index fund. Or maybe you will learn to more carefully research an investment before putting more than you can comfortably afford to lose on the line. Don't let fear be the limiting factor that mutes your potential. Rather, let weathering that storm be the fuel that propels you to success.

Use your fear to self-assess. Take inventory of the investments you have made in the past, and think about what you could do to produce better outcomes in the future. There is tremendous insight that can be obtained from physically writing down outcomes you would like to avoid. A written plan can prevent you from making emotional investment decisions in the heat of the moment. If you have a financial planner, tax planner or someone else who will look over your investment ideas, that adds an even deeper layer of reliability and accountability.

[See: How to Reduce Your Tax Bill by Saving for Retirement.]

Create a plan to avoid regret. A large loss can certainly cause you to regret a bad investment decision. But there's also the regret that comes from watching an investment soar when you could have gotten in on the ground floor. If you take the planning steps of inventorying and then analyzing your investment options, you can help avoid a negative result. Writing it down makes it easier to stick to a plan, especially when friends or pundits might try to tempt you to do otherwise. You can also take the planning process a step further to calibrate your life priorities and how your finances can help you achieve them.

Investing is ultimately about funding the lifestyle that you want to live. Choosing wisely could produce enough wealth to allow you to retire sooner or walk away from an unpleasant job. But you'll need to use logic and stick to a financial plan to successfully build wealth. Following the latest investment trend isn't likely to lead to financial success.

Brian Preston and Bo Hanson are fee-only financial planners who host the podcast, "The Money-Guy Show".

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