Hopefully you are convinced that you need to invest. As you start learning about investments, you will get plenty of advice. While many of them are good advice, here are the ones that I stick to religiously.
Sticking to them helps me stay away from shiny objects and helps me deal with fomo. You might have your own, but these will not hurt.
Only Invest In Instruments That You Understand
When you deposit money in bank fixed deposit (FD), they will promise you an interest (and the principal) at the end of the term. Hope you know that they are not just pulling out the interest from the top of their head. They give out your money as loans to their customers and share a portion of the interest earned with you.
So if the FD interest is 8% per year, you will never see a bank issue a loan at 6% per year. (If that was the case you could draw the loan at 6% and deposit in the same bank at 8% and keep the 2% profit at the end of the year!)
Always understand how your money will grow and where your money will be. If you do not understand it, choose a different instrument to invest in.
When do you understand an instrument?
- You are able to explain the instrument to someone else. Try explaining it to your parents, they might ask a lot of annoying questions especially if it is an instrument that they are not comfortable with. If you can answer all of them, you are good to go.
- You understand their business model enough to know how they are making a profit. We discussed the example of bank FD.
- You understand the underlying risks and is prepared to handle the most obvious ones.
- You know when to expect your money back.
Crypto-currency is a recent trend and I do not think everyone understands how it works and the risks involved. If you are so, simply skip. (I will write about my view on crypto in a future article.)
Always Protect Your Principal
Even if you do not make a profit, never lose your principal. If you remember high school economics, principal is the money you invest hoping to make a profit on it.
Sometimes you might see opportunities that will tickle your greed. That “guy” who offered 25% returns annually if you “invest” in his scheme. Any investment where you put your principal at risk with no hope of recovery is a bad investment.
Double Check If It Sounds Too Good To Be True
When I see an investment opportunity that sounds too good to be true, I am sceptical. I always double check.
Even poor (and borderline illegal) instruments can be marketed as the deal of the century. Learn to do the math and as the saying goes, “read the offer document carefully”. Ahem, stay away from ULIPs.
Understand that no investment is risk free. There is a difference between taking a calculated risk and being blind. The latter is more or less gambling.