Any money you expect to use within the next few years should be kept in the bank, where you can access it at any time. And if you’ve built up an emergency fund for unplanned expenses (which is something everyone should have), that money should sit in a savings account.
But when it comes to money you don’t expect to tap for many years, investing is your best bet, whether you do so in an IRA for retirement or in a taxable brokerage account. Investing your money gives you the opportunity to grow it into a larger sum. And the sooner you begin investing, the more time you’ll have to generate returns and grow wealth.
But it’s important to assemble a mix of investments carefully. And that means sticking to one key rule that financial guru Suze Orman is a big proponent of.
Make sure you understand where you’re putting your money
In a recent podcast, Orman said she doesn’t like to invest in assets she doesn’t understand. And that’s a really smart approach to take.
If you don’t understand how a given asset works, you won’t be in a good position to assess its value. And that could lead you to make poor decisions.
So, let’s say you’re interested in loading up your brokerage accounts with stocks. You might understand what stocks are and how they work — meaning, you own shares of a company that can rise or fall in value and, in some cases, collect dividend payments for being a shareholder.
But it’s also important to understand how the businesses behind the stocks you’re buying work — meaning, how those businesses make their money. If that’s something you can’t wrap your head around, you should focus on stocks whose business models are more clear to you.
Along these lines, a lot of people have jumped on the cryptocurrency bandwagon over the past few years because it’s grown to be a more popular investment. But if you don’t understand how cryptocurrency works or how it’s traded, then you really shouldn’t be buying it. Similarly, if you don’t understand the factors that influence the value of crypto (or that have the potential to do that in the future), then it’s probably not a great buy for you, even if it’s trendy.
You can educate yourself, but to a point
If there are aspects of investing you don’t understand, it always pays to make an effort to educate yourself. Many brokerage accounts have educational resources you can look at to increase your investing knowledge, so that’s a good place to start.
But ultimately, if there’s a given company or asset class you just can’t seem to understand, then it’s better to pass on it — even if everyone you know seems to be buying it. Assets that are popular aren’t automatically a sound choice, especially if you’re investing for the purpose of being able to retire securely. You’re better off following Suze Orman’s lead and limiting yourself to investments that don’t make your head spin.
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