Many investors are clueless when it comes to knowing how to invest. One reason for this is that they do not know the investment basics. Put another way, they have no investment knowledge so they have no way to intelligently select investments that fit their needs.
In fact, many folks have so little investment knowledge they don’t know what questions to ask when presented with an investment proposal. How would they when they don’t know investment basics. Relax, what follows will give you a base to work from so you can someday invest informed, not clueless. Learning how to invest is a process.
Here are five investment basics to be concerned with when considering any investment opportunity. Without this investment knowledge you cannot invest informed, you are clueless.
Liquidity…How quickly and easily could I sell this investment if I want all or part of my money back? Will there be charges, fees or penalties if I cash in early? Don’t lock yourself into an investment if you may need access to your money in the next few years.
Safety…On a scale of 1 to 10, how safe is this investment? Will the value of the investment fluctuate? This investment knowledge is crucial if you cannot afford to have this money at risk. If you need safety a CD at the bank is appropriate. A growth stock is not.
Growth…A growth investment has the potential to deliver higher returns than money in the bank. Growth is necessary for investors accumulating money for retirement. It is also necessary in order to stay ahead of inflation and taxes. Stocks are growth investments, but such investments offer few if any guarantees, and prices or values will fluctuate. Don’t ignore the most basic of investment basics: where there is high growth potential there is also risk of losing money.
Income…Some investments pay higher income then you can get at the bank. Bonds and bond funds are examples. Don’t expect to get higher income without some risk. If someone promises you a risk-free 6%, 7% or more per year in interest or dividends when your bank is offering only 3% or 4%, show your investment knowledge. Show them the door.
Tax Advantages…Certain investments or types of investor accounts offer tax advantages. Examples include municipal bonds, the IRA and 401(k). Take advantage of these tax breaks if they are appropriate for you. But invest informed. If you pull money out of an IRA or 401(k) too soon, you may be subject to taxes and penalties. Beware or anyone offering you a tax break that seems too good to be true.
Now, when faced with an investment decision, consider all five of these investment basics. There is no perfect investment. Don’t be mislead. A growth investment is not safe, and a safe investment doesn’t pay high dividends or grow at an annual rate of 15% or more.
It’s all a matter of trade-offs and finding investments that fit you. Once you know the investment basics it is much easier to increase your investment knowledge.
Get up to speed, don’t invest clueless. Put some effort into learning how to invest, so you can invest informed.
A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.