Common Due Diligence Questions Investors are Asking
Understanding your investments is essential for growing your portfolio. Ignorance could cost you money, so it’s crucial to do your due diligence and ask the proper financial and cybersecurity questions. Rather than risk your hard-earned cash on a hunch or hot tip, be strategic to prevent the avoidable risk of a catastrophic loss.
To avoid unnecessary risk, research each investment before you put a penny toward it. Getting answers upfront can spare you from facing expensive losses later. To help guide you through the process, we’ve developed a due diligence process to use as a starting point.
Due diligence questionnaire
You can use a due diligence questionnaire to evaluate your investments’ financial, cybersecurity, and IT management aspects. The following are some cybersecurity and financial due diligence questions to ask.
1. How could this investment help me reach my portfolio and personal goals?
The goal of investing is to maximize your profit at a minimal level of risk. To achieve this, you’ll build a diversified portfolio of risk-managed, non-correlated investment strategies that leverage a competitive advantage in real estate, business, or paper asset investing. To invest successfully, you need both a portfolio objective and a personal objective. The investment you choose should honor your interests, skills, and personal values.
Determine which niche you want to invest in by identifying the characteristics that best suit your investment goals and risk tolerance. For example, if you plan to invest in real estate, select a niche like single-family homes, offices, commercial real estate, mini-storage, mobile home parks, or apartments. Different investments may be more passive or active, so you can select a niche based on how hands-on you want to be.
2. How could I lose money by choosing this investment?
To thoroughly understand an investment, you should be aware of all the ways you could lose money by investing. After all, your goal is to realize a return. Do not proceed without researching and identifying every possible risk and managing each to mitigate loss. With a proper investment strategy and portfolio, you can significantly reduce your risk to more acceptable proportions.
For example, when playing the stock market, your investment could fall into one of the following risk categories.
- Industry-specific risks: These risks could include things like disruptive technology, industry law changes, a downturn in demand, and changes in consumer tastes. One strategy for controlling these is to not pour all your money into a single industry.
- Company-specific risks: A company-specific risk is anything that may affect a particular business, such as a lawsuit, mismanagement, or accounting scandal. You can manage these risks by diversifying among several companies via cost-effective tools like exchange-traded funds and mutual funds.
- Market risk: This risk refers to a downturn in investors’ appetite for stocks, which can reduce equity valuations. You can mitigate market risk through hedging, sell discipline, or diversifying into some non-correlated markets like commodities, cash, or real estate.
- Investment style risk: You should also be aware of any possible pitfalls of concentrating your investment style on one specific strategy, such as growth vs. value or micro-cap vs. large-cap.
3. What is my exit strategy?
Before you invest, you should also establish an exit strategy. Times, objectives, and market conditions change. When your original reason for investing is no longer applicable, it’s time to sell.
Building a portfolio is like tending a garden – you’ll need to do some pruning to make room for new growth. Railroads used to be the undisputed champion of transportation, and properties in the Rust Belt were once a surefire real estate boom, but things change over time, and you need to be adaptable. If possible, predefine your exit points in terms of price. If things go wrong, this will allow you to control your losses.
The goal is to conserve capital, so you’ll be ready for the next investment opportunity. By pruning specific investments as necessary, you will make room for new growth in your portfolio.
4. How will this investment impact my risk profile?
Any investment you add to your portfolio should either raise your return or lower your risk. Ideally, an investment should do both. Generally, the higher the risk an investment poses, the higher a return you expect over time. Similarly, the lower the risk, the lower the return. For example, stocks and real estate can correlate in your favor.
5. Does this investment opportunity make business sense?
Each investment you choose should make business sense, meaning the valuation, return on investment, and earnings should be congruent with the underlying barriers to entry and competitive advantage. You want to select an investment that offers a significant competitive advantage and deters future competitors. If these characteristics aren’t present, the high returns and valuations will attract competition until these valuations and returns drop to market level, which will lead to a loss for your investment.
Similarly, use business common sense to avoid potential frauds, such as a Ponzi scheme with outrageous interest rates. Ask how the underlying business could be earning the promised exorbitant returns, what barriers to entry might prevent competition from reducing these returns, and whether there are any guarantees. If an investment opportunity seems too good to be true, it likely is.
Ask the cybersecurity experts at Agio
At Agio, we provide leading technical support and cyber-protection to the financial services industry. We have extensive experience maintaining, building, securing, and optimizing IT infrastructure for private equity, hedge fund, and asset management firms. We prioritize timely, frequent communication to ensure we provide you with highly personalized, unrivaled service across all our solutions, including:
- 360-degree cybersecurity programs
- Desktop as a service
- Technology hosting
- Global service desk
- Disaster prevention
- Virtual CISO support
- Managed detection and response
We’ll make your technology faster, easier, and safer. Contact the cybersecurity experts at Agio to learn more about cybersecurity due diligence.
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