Someone asked me over the weekend what I thought were the two most important pieces of investment advice. Just two? Ok, well below was my response.
This was a very tough question because obviously there are a lot of very important things to understand when it comes to investing.
1) Understanding the concept and relationship of risk and return. Riskier assets such as stocks and most real estate require a higher return or yield to compensate for the risk taken. Also, watch out if some snake oil salesman says he can get you a risk-free high return - just not true. High risk - high return and low risk - low return.
2) Understand the investments. This means a thorough understanding. It doesn’t matter if its a mutual fund, an exchange traded fund (ETF) or stock. And it doesn’t matter that a financial advisor has recommended something. Know where and what your hard earned money is going into because it may not be what you like or are comfortable with (despite potential for high return).
I can’t pass up the opportunity to add two more pieces of investment advice - that’s just how I roll:
3) Consistency is important. This means making investing a habit or routine - whether on a monthly basis or quarterly basis.
4) Understand your risk tolerance. No one can tell you what your risk tolerance is. This is a very subjective thing. Once you understand your risk tolerance don’t stray away from it no matter how attractive an investment may be.
How about you? What other investment advice do you have?
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