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April 27, 2021

Investing 101

(*Content provided by the White Coat Investor)

Don't Buy Investments You Don't Understand

This one seems so obvious when you say it like that, but it is an incredibly common thing that people do. “I didn't know that investment could do that.” “I didn't know there was a surrender fee.” I didn't really understand how that worked.” “I didn't understand the tax consequences of that investment.” Every day I run into somebody who has purchased something they didn't understand, and it isn't always whole life insurance.

Limit Speculation

Investments that don't generate income are speculative and should make up a very limited if any, part of your portfolio. The classic speculative investment is empty land. You know, a real estate investment that not only doesn't provide any income but actually has expenses like insurance and property taxes. Gold, Yen, Bitcoin, and Beanie Babies are also speculative. If you want to put some small part of your portfolio (<10%) into stuff like that, that's probably fine. But I don't put any of my portfolio into speculation. That's serious money I carved out of my income and didn't spend. I'm not going to just play with it. I've got hobbies that are way more fun than that.

Higher Risk is a Necessary But Not Sufficient Condition For Higher Returns

Lots of people have heard the old adage that higher risk = higher returns. While there may be a correlation there, it certainly isn't always true. Some risk isn't compensated. There are plenty of risky investments out there with low, no, or even negative expected returns. Don't buy those. Think Roulette- it's high risk, right? So there must be a high return, right? No. The expected return is negative on roulette. That's why it's in a casino. Casinos don't have games with positive expected returns.

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