1.Things you don’t understand: what traps people
One of the key elements to an investing decision is being aware of what each investment’s role is in your portfolio. Each investment is like a performer and there should never be a performer doing absolutely nothing.
All in all, these investments should help you achieve the goals that you want. For example, if you want to buy a house in, say, 10 years, you’ll want to look for investments that have a high growth potential.
You also want to be aware of the risks and how they stack up to your tolerances. You can gauge this by asking how you’d react if you noticed a dip in price versus a 30 percent drop in what you owned. Some would be cool with the small fluctuations in price, but others would be in utter shock, and probably would lose sleep if they lost 30 percent.
In the end, risk tolerance is your own personal feeling towards risk, but a good rule to follow is this: if you’re worried about losing money from this investment or you don’t understand it, then it’s probably a bad investment for you.
2. The dangers of things you don’t understand
There is a saying in the investing world, that is – a great rule to follow: look at the downside of every investment before you invest.
To expand on that, you want to be investing only in things, where the downside risks to the investment are quantifiable.
In other words, if you have no clue what a broker, banker, financial advisor, or anyone else is telling you about any sort of investment, then avoid it. This goes for everything about the investment. The risks and returns, what the downsides actually are, or even the sides at all. Everything.