How I invest (part 1 of many)
Heard of bitcoin? Non-fungible tokens? Ethereum? Dogecoin? Naked short selling? Credit default swaps? How much of those do you understand? A lot? Maybe not so much? Because I will freely admit, there’s a lot I don’t understand in there.
And you know what? I’m in good company.
Here’s the thing: There’s nothing wrong with admitting you don’t understand an investment. There are so many investments out there that I look at and scratch my head over. NFTs, the above-mentioned non-fungible tokens? I cannot wrap my head around them. Cryptocurrencies? All I can think of is that you’re depending on someone to buy it at a higher price, but that they have no inherent value.
I could very well be wrong about all of them! Plenty of people have built fortunes around these investments. Great for them! But here’s one of my bedrock rules of investing: I don’t invest in something I don’t understand. If I don’t get how an investment is supposed to make money, or how I’m supposed to cash out someday, or how it even makes any sense, I walk away from it.
If you’re spending money just on a vague hunch or on some idea about luck or because a good pal told you to, you’re not investing. You’re gambling. Despite so much of the casino imagery around financial markets, there’s a difference — and a big one.
Remember the housing meltdown of 2008 and 2009? A big part of that was because investors were pouring money into financial instruments they didn’t really understand. Heck, even the credit rating agencies didn’t really understand many of them. Investors bought these instruments up for a lot of reasons… often bad reasons. Seeing everyone else wanting money and wanting in? Fear of missing out? This idea that they had to hop on a runaway train now now now before taking the time to understand what they were doing?
YOLO is not an investment strategy.
When I invest, I like to have some idea of what I’m buy and where it’s going to make money. I’ll detail in a future post the kinds of investments I like best (get ready to hear the phrase “index fund” a lot), but for now the main takeaways are that I need some understanding of where my money is going and how it’s coming back to me (come to Mommy, little money! I’ve missed you!).
It’s tempting to look at things like cryptocurrencies and think to yourself, wow, if only I’d bought bitcoin when it was at $xyz; then I could have sold and made a fortune.
But that thinking is wildly unfair to yourself and frankly unrealistic. That supposes you had the knowledge you have today, including not only that bitcoin would go up but knowing the perfect moment to sell. And just because you know that now, with the benefit of hindsight, definitely does not mean you would have known it at the time.
There are plenty of corners of the internet that will tell you how to invest in those kinds of riskier assets if you want; many of those corners will probably push you to make those kinds of buys even if you don’t really know what you’re doing. If that’s your bag, well, you do you, boo.
But that’s most definitely not how I roll, and that’s not how my portfolio rolls. That’s not how I invest… because I don’t really see that as investing.
