Type “rules of investing” into a search engine and you’ll find no shortage of results. On the first page of Google alone, I counted approximately 103 rules of investing, judging by article titles.
Granted, many of these rules probably overlap from article to article, but there is one important investing rule that rarely gets mentioned in these types of articles.
This is unfortunate because, in my opinion, it’s one of the most important rules of investing, yet, it’s one that almost everyone breaks at some point in their investing lifetime.
In fact, it’s so important, that it’s arguably “rule one of investing.”
Rule one of investing
So, what is this all important, yet often broken rule?
Don’t invest in something you don’t understand.
If you follow this one rule, you’ll avoid an avalanche of investing mistakes that can come crashing down on investors that break this rule.
I’ve met far too many folks that were sold unnecessarily complex and expensive investment and insurance products, only to find out later that these products didn’t meet their needs and/or were a poor fit for their situation.
I’m not saying that there’s a “one-size-fits-all” strategy that works in every client situation or that all product salespeople are evil.
There isn’t and they aren’t.
What I AM saying is that if you follow rule one of investing by asking a few more questions and waiting until you understand an investment before forking over your hard-earned cash, you’ll likely avoid some of the most expensive mistakes of your life!
A quick test to save yourself FROM yourself
If you can’t explain the investment, how it works, and the investment’s risks in a few sentences, then you probably don’t understand it enough to invest in it.
Before you go any further, ask your advisor to explain the investment again (and again and again) until you can understand it and articulate it in your own words.
Does this mean you need to understand the investment well enough to write a book about it?
No, of course not.
But, at a bare minimum, you do need to understand…
- Where your money is going
- What risks and costs are involved with the investment
- Why this is the best investment for your situation
If your current advisor isn’t helpful in this regard, it’s time to find a new one.
There are plenty of advisors out there (like myself) who have the heart of a teacher/coach. These advisors will work hard to explain their recommendations in a way that’s simple and easy to understand.
Is it really that simple?
Some of you may be asking yourself the question…
“Seriously? It can’t be that simple. There must be more to it than that.”
The long answer is that in some ways, you’re correct. There’s certainly a lot more that goes into setting yourself up for the best chance of long-term investing success.
If there wasn’t, I’d be out of a job!
The short answer though is, “Yes, it really IS that simple!”
With all of the time, preparation, research, and wisdom it takes to plan and map out your investing journey…it only takes one bad decision to ruin those plans.
So, ask a few more questions now or be prepared for a mountain of regret later. Or, as the old saying goes, “Trust, but verify.”
The bottom line is this…don’t invest in something you don’t understand.
That’s rule one of investing.
What about rule number two?
Ah, that’s easy.
Refer back to rule number one.