This is the question that we usually ask when we have amassed a decent balance in our savings or checking account. For some, it might be 10K and for others a million. The amount is irrelevant. We are willing to venture out and ready to take risk as long as the return is higher than the savings accounts or fixed deposits.
Should we invest in real estate, mutual funds, stocks, gold or insurance? We turn to our accountant for advise, watch or listen to stock channels and other investor friends. We start reading Money, Fortune, Kiplinger’s or other personal finance magazines. In addition to all this, the endless hours are spent surfing Morningstar, MSN money, Motley Fool and other financial websites, researching the best performing mutual funds, industries or stocks.
We use the same approach for our brokerage, 401K and other retirement accounts as well. Again we turn to our colleagues and friends for some tips. The discussions regarding our risk appetite and the kind of return that we expect, gives us some comfort.
Now all these sound like sensible things to do, right? Not quiet. There’s big flaw with this kind of investment approach. The problem is that we are looking at an investment in isolation. We’re simply chasing returns without understanding the risk.
Either we are totally risk averse or we end up taking too much risk. We all know what happened to the retirement and other savings during tech meltdown. Most of the folks had put in as much as 80% in stocks. Same thing happened during the real estate (in US) boom of early 2000, people were putting all of their savings in investment properties. The pain of previous two stock market meltdowns might be a distant memory but we are still underwater as far as the real estate is concerned.
The latest craze is gold. Who wants to sit on cash when you can get far better return in stocks, real estate or gold? Yet history shows again and again, what goes up…does eventually come down. The unique feature of any bubble is that nobody knows when it is going to bust. So don’t feel bad about missing out on previous decade’s gold run or the recent rally in stock markets.
Instead let’s take a planned approach. It is worth spending some time and effort in learning the principles of sound investing. The process of learning reminds me of a quote by Jim Rohn:
“Learning is the beginning of wealth. Learning is the beginning of health. Learning is the beginning of spirituality. Searching and learning is where the miracle process all begins.”
So let’s start with this miracle process. It is not that difficult but the rewards are big. Not only will this take care of our financially needs but will also stand against the test of time.