I have introduced the basics of investing in the past. Investing basics is such an important topic, that today, I’m providing the bullet version. Review the brief version below, and then read my more in-depth posts on the topics you want more information for. This will prepare you for more detailed investing topics I will provide in the coming weeks.
Investing Basics Summary
- The most basic principle of investing is the tradeoff between risk and reward. The greater the investment risk, the bigger the potential reward; the safer the investment, the lower the expected reward. Be skeptical of any promise for high reward with little risk.
- All savings and investing have some degree and type of risk from losses, inflation, or liquidity based upon uncertainty of what will happen in the future; the greater the uncertainty, the greater the risk.
- If your savings do not compound or grow faster than the rate of inflation, then your savings will lose value or buying power as time goes on. Many people fail to realize that even if you do not lose money from your savings directly, you may still lose value from inflation.
- You cannot build wealth by keeping your long-term savings in a bank account, certificate of deposit, or money market fund; you probably won’t even keep up with inflation.
- The greater your risk and the longer your investment’s future uncertainty, the more you want to be rewarded for investing and risking your savings, so the greater your expected return. Conversely, the lower the risk, the less someone is willing to entice you with compensation so the less your return will be.
- When you develop your investing goals, you will want to balance liquidity (how easily you can get your money back), safety (preserving money from loses and inflation), and total return (how much are you rewarded for what degree of risk).
- Rather than focus on the risk of losing money, concentrate on liquidity — when will you need to convert your savings investment back to cash. Thus, keep short-term investments in safer, low return investments and long-term investments in riskier, higher-return investments.
- The guiding principle of this investment section is that investing can be as simple or as challenging as you want it and the more complex isn’t necessarily the most profitable.