Unless you have millions of dollars and nothing but time on your hands to spend researching investments, investors should stay away from exotic investments. Ninety-nine percent of investors should invest in classic investments such as stocks, bonds, mutual funds, money market funds, and the like. Nothing but trouble can come of average investors wasting their money in wild investments.
Invest In What You Know. Most investors who have a day job in something non-financial will struggle to be able to explain how options work. And, that is just one example. Credit default swaps baffle people. Many people reading this may never have even heard of them, and that is great. You don’t want to know! Ignorance is bliss in this case. Stick with investing in what you know. That has been the advice and the mantra of the world’s best investor, Warren Buffett. He famously refused to invest in technology stocks at the height of the tech bubble because he said that he did not understand the business or what they did for a living or how they made their money. So, for Buffett, he simply refused to invest in a business that he did not understand. That is exactly what almost all investors should do as well. If you do not truly understand an investment or how a company earns its money, then you should not be investing your money in there. It is very hard to stick to this strategy these days with the amount of advertising bombardment that we are subjected to these days.
Mutual Funds Safety. Mutual funds are safer than individual stocks. Mutual funds invest in the stock shares of as few as twenty and in as much as a few hundred different companies. A mutual fund is a professionally managed type of collective investment that pools money from a lot of investors and invests that money in stocks, bonds, short-term money market instruments, and other financial securities. A mutual fund is by definition a more diversified financial instrument than stocks alone. Instead of relying on only one company’s stock to help you retire, your fortune is resting on the collective success of money companies. So, if one does poorly in a group of one hundred different companies, your total investment will not suffer as much.
Plain Vanilla Is Okay. I love boring investments. Most Americans have a good portion of their investment portfolios tied up in index funds, and that is the way it should be. It is like the tortoise and the hare. Slow and steady win the race in investing as well. I have even gone as far as to compare investing in index funds to eating glazed doughnuts. Glazed are not my favorite doughnuts, but they are a little more healthy for you than chocolate with sprinkles.
We should be boring investors. Most of our investment should be on autopilot. Most of the average investors’ money should be tied up in common, unsexy investments like mutual funds, stocks, and bonds. Most of your investments should implement dollar cost averaging in order to invest a set amount of money in a stock, bond, or mutual fund no matter what the share price is. Some days you buy more when the prices are down, and other days you buy less when prices are rising. It all averages out, hence the name.