Never Invest in Something You Don’t Understand

Last Updated on: September 18, 2023

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

You should only invest in something that you fully understand.

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 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, run as fast as possible 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?

King Chess Piece
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Knowing your risk tolerance is one of the main considerations when choosing any investment product.

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

I know some people who invested in the stock market whose risk tolerance is incompatible with it. What happened is they became very anxious after their investment portfolio started to lose value. So, it is important to align your investment to your risk tolerance.

Is this investment a good investment?

Black Blue And Red Graph Illustration
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“Is this a good investment?”

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

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. The initial covid-19 community quarantines in 2020 made many families anxious and insecure because they didn’t have enough money for their needs after they lost their jobs. 

But an emergency fund can help lessen some of the burdens. I’ve written something about emergency funds here.

How about speculating in cryptocurrency?

Ripple Etehereum And Bitcoin And Micro Sdhc Card
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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 jump anyway because you saw your friends posting about it on social media. Another case of FOMO (fear of missing out).

Related: Investment Hype From Social Media? You Might Already Be Late

Final Thought

Though taking advantage of the time when investing is important, 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 made the initial preparations, investing will only get easier.

You don’t need much 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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