Never Invest in Something You Don’t Understand

Never Invest in Something You Don't Understand

Last Updated on February 19, 2022

I’ve met many people who became so excited to start investing, maybe after hearing positive reviews from family, friends, and workmates regarding certain products.

Though it is good that they are starting to understand the importance of investing as early as possible, there is a fair warning. You should only invest in something that you fully understand.

How many news and stories have we heard about “risk-free” investment schemes which have been profitable at first, then the bubble burst, and the investment came crashing down like a house of cards.

There is a saying which goes like this, “there is no such thing as a risk-free investment. If someone offers you one, then run as fast as you can and don’t look back.”

So, the first thing to know is the legitimacy of the investment product being offered. This can easily be checked through the Securities and Exchange Commission (SEC) website. Click here for the link.

What about risk tolerance?

One of the main considerations when choosing any investment product is first to know your risk tolerance.

Risk tolerance is an investor’s ability to sleep soundly even if his investment is crashing.

You can test your risk tolerance using this website.

I know some people who invested in the stock market whose risk tolerance is not compatible with it. What happened is they became very anxious after their investment portfolio started to lose value.

Depending on your risk tolerance, you can align your investment accordingly. A quick guide to knowing which investment is for you can be found in Fitz Villafuerte’s blog.

Is this investment a good investment?

I am not an expert regarding investment and can only speak based on experience and what I’ve learned from different books and articles.

Whenever I’m asked this question, I answer them with two questions of my own.

  1. What is your investment goal?
  2. Do you have an emergency fund?

The first question you should always ask yourself is, why do you want to invest?

What is your motive or goal? Is it for a house, for retirement, for a car, or education of your kids? Your ‘why’ will determine your time-horizon and investment vehicle.

The second question is as important. This Enhanced Community Quarantine (ECQ), brought to us by the century’s worst pandemic, made many families anxious and insecure. But an emergency fund can help lessen some of the burdens. I’ve written something about emergency funds here.

How about speculating in Bitcoin?

A few years ago, Bitcoin and other cryptocurrencies became mainstream, and people started ‘investing’ in them. The problem is, many of them did not understand how it works (or what blockchain is) and just blindly jumped on the bandwagon.

Unfortunately, when the Bitcoin bubble popped, many lost a substantial amount of their investment, including their life savings.

That is the problem with speculating. You don’t know anything, yet you jumped anyway because you saw your friends posting about it on social media. Another case of FOMO (fear of missing out).

Final Thought

Though it is important to take advantage of the time when investing, it will be wiser to increase your knowledge first.

The first investment should always be in the head.

You don’t have to be one of the victims of get-rich schemes. As long as you have a check on your greed and pride and a little bit of common sense, falling prey to scams can be avoided.

And once you’ve taken the initial preparations, investing will only get easier.

You don’t need a lot of capital to begin as long as time is on your side. But more importantly, establish your “why” and do your due diligence before taking the plunge.

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2 responses to “Never Invest in Something You Don’t Understand”

  1. […] So, before venturing into the stock market or any investment instrument, it is crucial to know its risks. Simply said, never invest in something that you don’t understand. […]

  2. […] remember to only invest in the things that you fully understand. Many people, driven by greed and the hope to make a quick buck, are victimized by scams. So do […]

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