Warning: Investing is Not Gambling

 

Warning: Investing is Not Gambling

When it comes to investing, there are three guiding principles, if followed carefully, you're set up for success:

Free is not necessarily a good thing;Free advice is the most expensive advice; andDon't invest in something you don't understand.

There has been a sudden surge in the number of online investing accounts being opened in the past year, driven by brokers not charging clients any commission. This was like an open invitation for many to jump on the ship with no idea where they're going. The fact there is no cost for trading online on those platforms made more people treat investing like a game or a side hustle that they don't understand.

Those same platforms offer free courses and webinars that appear as expert advice, which makes their clients feel they understand what they're investing in. The result is more exposure to things they don't really understand or even explain to others.

The other day, a friend was talking with a very high level of confidence, like a guru, about the profits he has been making in cryptocurrencies. Everyone in the room opened their eyes and wanted to jump on the ship. I then asked him to explain what he's investing in, he started to use all technical jargon about blockchain and farming to an extent he was lost and had everyone else lost in the room. The thing is he doesn't really understand what he's into. He just got lucky when the trend in bitcoin is going up... before the roller coaster moves down at high speed (but it's only my opinion).

Related: Brace Yourself For The Bitcoin Roller Coaster Ride

Warren Buffet recommended that investors never invest in a business they cannot understand. He also added, “What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know.” In other words, investing in what you don’t know or understand cannot be classified as investing. Actually, investing in something you do not understand is pretty much like gambling. Buffett has three boxes for investment ideas: in, out, and too hard. If a company's business or product is too difficult to understand, it's better to just file it in the "too hard" category and move on to another opportunity.

I can’t believe I need to say this, but here goes: Investing is not gambling.

Related: Do Investors Have Specific Knowledge That Most People Cannot Have?

Never Invest In Something You Don't Understand

Many people are putting their hard-earned money into investments they don’t understand in the investment world. They just follow a friend's advice or a contact's post on social media on how they made a profit. They want some of the same things these people are getting without a minimum level of understanding the dangers and risks. The online world facilitates all of that with easy sign-ups and instant activations with instant payments using credit cards.

Let’s review some key questions each investor needs to have answers to before signing up and going in any trade.

When is it time to sell?

The barber, taxi driver, or colleague who offers stock tips is a cliché. They might be very good stock pickers; however, making money in the market involves two points: When to buy and when to sell. The thing is you're becoming dependent on advice from a person who isn't an investment professional and who even can't explain why it's a good investment to go in.

Let's assume their advice was sound (or just lucky), and you bought at the right time, you're in the game. Do you know when it's time to sell? Will go again and ask them for advice? If you answered yes, then again you're relying on cheap or free advice.

Liquidity

There are investment products that might be attractive and solid but investors can't get their money if they suddenly need it. Some examples are investing in real estate crowdfunding, REITs, real estate syndications, insurance products, limited partnership investments, private equity, or hedge funds. While those might be solid investments (and most are), there might be hefty surrender charges because the buyer is supposed to be making a long-term commitment. Those solid investments often come at a cost.

Are Their Potential Losses?

Every investment, whatever safe it appears to be, comes with an inherent risk of losing some or all your capital. This also holds to money parked in the bank, which could be insured up to a certain limit. This means, if the bank gets bankrupt, you're covered up only to the limit of the insured amount.

If you're trading on margin, you're most probably aware you will need to put up more money if the investment moved against you. But what is not commonly understood is your brokerage firm has the right to sell your investments, especially if the market moves sharply. You've already agreed to all those conditions when you signed up and checked all those small boxes on the screen that say you've read and understood the disclosures.

Many people invest without having all the facts. Adding perspective and highlighting risks are some of the ways investment advisors add value.

Bonus: Book your free discovery and strategy call with your personal finance advisor