Wednesday, April 30, 2008

* The Most Dangerous Investment

The most dangerous investment is not investing in hedge funds, or even in derivatives. Though very risky, investing in penny stocks or day trading is not the most dangerous investment. Neither is investing in gold, or other commodities. Though investing in emerging markets focused on countries with unsettled governments is quite risky, it is still not at the top of the list. Even "investing" in lottery tickets is not the most dangerous investment.

All the above have something in common - there is a chance of success, albeit very small in several of them. The most dangerous investment has zero chance of success. It is simply not investing at all. I do not consider money market accounts (MMAs) and CDs as investing; they are just another form of cash. With MMAs and CDs your best case scenario would likely be to keep up with inflation.

Before investing, here are some things you should consider:
  1. Do your homework before turning over your money. If you entrust your money to someone else, make sure they are a licensed and registered investment professional. In the U.S. you can use BrokerCheck to check the background of your investment professional.
  2. Understand what you are investing in. If someone can't explain the investment where you quickly and completely understand how it works, then you should not be investing in it.
  3. Make sure the investment meets your needs. Understanding an investment is not enough. I understand how a lot of investments work, most of which I would never invest in because they are outside of my defined long-term strategy.
  4. Diversify based on a sound asset allocation model. Never put all your eggs in one basket. Spread your risk among different industries, companies (size and type), and kinds of investments. Never invest more in any one security than you can afford to lose.
The U.S. Securities and Exchange Commission (S.E.C.) has a wealth of information for investors. One item you may find useful is "Questions You Should Ask About Your Investments". It is not only good for new investors, but also is a good reminder for those of us who have been around the block a couple of times.

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