Aug 28th, 2008
Invest in What You Know
One of my friends asked me this past week about investing in a high tech, actively managed mutual fund.
“What do you know about it?” I asked.
“Only that someone recommended it.”
This is one of the biggest investing mistakes I think anyone can make. If you’re going to make an investment, it’s important that you understand what it is. Would you spend thousands of dollars on something that you didn’t understand? If your answer is no, then why consider spending thousands of dollars investing in something you don’t understand?
We’ve discussed things like mutual funds and indices time and again in this blog and we certainly will again. While I think investing in these is smart, I think it’s even smarter and more important that you understand what they are before you part with your hard earned money. And if you’re going to invest in individual stocks (I do, although with less than 10% of my portfolio), I would suggest even more strongly that you not only understand the companies in which you are investing (Remember: if you buy company stock, you own part of that company!), but you believe in it, too. I don’t know a whole lot about Saga Communications, Inc. (SGA), so I won’t be investing in that, but I do know a lot about Apple, Inc. (AAPL) and Toyota (TM)–I buy their products and believe they are the best in the world in their fields–so I’ve bought into them.
If you don’t understand an investment, stay away! Go ahead and research it and learn about it if you’re interested, but don’t throw your money blindly into a company or product you don’t know anything about. In the end, your portfolio will look better–and you will feel better–because of it.
