4 Things You Must Know About Investing

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As promised, I am venturing into some investing basics.

But, wait, before you get excited, I have no hot stock tips.

In fact, that is exactly what this post is about - what you need to know before you listen to other people.

So, although these are just a few basics, here are 4 "must knows", in my humble opinion:

• Saving and Investing are two completely different concepts. Yes, I know I probably sound like a broken record, but after what has happened in the world - both close to home and abroad - I feel like this point must be made again and again: You must save, you do not have to invest. When you invest, you are taking a risk that you could lose your entire principal. That is the reality. And you take that risk in expectation of a higher return than you can get on money you save. On the other hand, when you save, a portion of your saving in a regulated licensed deposit-taking institution is insured to a limit. Some people use the terms "saving" and "investing" interchangeably but in reality they are not. Quick Tip: Given the proliferation of financial products and Ponzi schemes, make sure you get details of what happens to your principal. Just ask. These days, return of principal is just as, if not more important than return on principal.
  

• Your savings, obligations and age matter - a lot! In other words, don't invest until you have a comfortable cushion of savings. Experts say 3-36 months of salary. In this environment of uncertainty in the cost of living and job losses, 3 months worth of savings is far too low in my humble opinion. If you have high expenses and obligations, then you cannot afford to risk money that you could lose (remember, that is what an investment is). Finally, the older you get, the less risk you can afford to take. That makes sense because your potential working years are declining, and you are coming closer to retirement.

• Do not invest in things you do not understand. How many times have people tried to convince you of "a sure thing", and told you "here's a hot tip"? It may very well be, but if the person telling you cannot explain the investment and why it's such a "hot tip" or a "sure thing", then that's grounds to doubt it. And it would be prudent to understand what influences the investment - what external factors are likely to make the investment do well or do badly. No one is expecting you to be an expert, but it's your money - you should be able to evaluate if what the "expert" says makes sense.

• Know Yourself. Believe it or not, this is one of the most critical things about investing - knowing your own risk-tolerance. You may get a great tip, understand what the investment entails, understand that it's an investment (as opposed to savings), but it may just be too risky for you. On the other hand, remember that not all investments carry the same risk, and some - under the right circumstances once you have sufficient savings tucked away - may just be right for you.