My First Rule of Investing

Understand Before You InvestAsking for financial advice (and especially investing advice) is like asking for recommendations on a local restaurant. If you ask 10 different friends, you’ll likely get 10 different answers. Many of which, by the way, will be conflicting: “Whatever you do, don’t eat at Ernesto’s Pizzeria” “What?! I love Ernesto’s!” Or one we’ve probably all heard: “Just don’t buy individual stocks.” “What?! I love stock trading!”

The simple fact is that we all have our different tastes, or rather, we are all in different financial situations and so we’re all a little unique in what options are “best” for each of us. Maybe even more important: We all have different levels of understanding of the various investing options. While at the gym this morning I heard Suze Orman on the TV remind everyone of the advice that we’ve probably all heard time and time again: Don’t invest in anything that you don’t understand. This is one of the reasons why simple index and mutual funds are good fits for many people: they are easier to understand than others. This is also why bonds and day trading aren’t right everyone.

Understand It, Then Invest

Those that know that I run a finance software review website, sometimes come asking me for advice on their investments. It’s not uncommon for these questions to arise, usually because of something they’ve heard on the radio or TV. “Should I start looking into investment properties?” “Should I just put everything in a savings account?” Or my personal favorite, “I got a hot tip on a new penny stock, should I buy?”

My answer always starts and ends the same way. First, I tell them I’m certainly not the one they should be asking for investment advice (but I can sure point them in the right direction for their budgeting needs)! Second, I ask them how much they know and understand the details of that specific investment vehicle. Most of the time, they don’t know squat — which is why they are asking me, who doesn’t know much more than they do!

So as Suze Orman did this morning, I remind them, as well as you, that you should never invest your hard earned money into something that you don’t completely understand. That’s how money is lost, either through dumb investment decisions, and even scams. Start simple (and maybe even end simple — there’s nothing wrong with that). And if you so desire, you can venture out into other, more volatile, waters as your understanding increases. But just remember, whatever you do, don’t eat at Ernesto’s! ;)

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