Rule #1: You must understand what you’re buying. Too many people go into investing with their eyes closed, simply following the directions they’re being given by someone else. My motto is, “If you can’t explain it to a 12-year-old, you can’t buy it.”
Rule #2: You must understand how long it’ll be until you need the money. Less than 10 years means you shouldn’t put the money into the capital markets since you don’t have enough time to recover from a downturn.
Rule #3: You must be true to your personal risk profile. That means understanding just how much of a chicken you are. Big chicken? Don’t get talked into investing in things with risk since you’ll run screaming from the markets at just the wrong time. Little chicken? Then branch out as far as rules #1 and #2 will let you.
Perhaps the best way to venture into investing is to build a phantom portfolio and practice by watching what the investments do and how you react. Choose 10 investments you’d consider buying. Find a website that let’s you pretend you bought them, or track them using a spreadsheet as if you had bought them. Watch what happens and how you feel about the changes as you learn more about the investments you’ve “purchased.”
The follow-up question that comes after this mini-lecture is usually, “Okay, but there are thousands of things I could invest in, where would I even start?”
It’s a good question. I’ll talk about that in my next blog post.