Matt’s General Investing Tips reflect common investment wisdom as I understand it. There is nothing new or shocking here. This is mainstream investment advice. If you’re looking for an introduction to the various investment vehicles, Matt does an excellent job summarizing the pros and cons of stocks, bonds, and mutual funds.
Matt stresses several factors:
- It is not possible to outguess the market. “If you see a piece of news in the media you should remember that the effects of the news have already been accounted for by the market.”
- Riskier investments produce higher potential returns. The market prices in risk. But to take advantage of the increased returns associated with increased risk, you have to have a long investment horizon.
- Diversification helps you by doing two things: it averages the risk among all your investments, and it narrows the effect of risk (that is, if something bad happens, it’s only happening to a portion of your portfolio).
- Diversification becomes more important as investments become riskier.
- A sound investment strategy can only be achieved by choosing an investment time horizon. Are you investing for the short term? For the long term? You need to know the answer to this question before you can choose an appropriate investment.
Matt also lists the basic investment vehicles available to the average investor. His list is ordered approximately from lowest risk to highest risk:
- Savings accounts
- Certificates of deposit
- Money market funds
- Bond-based mutual funds
- Index-based mutual funds
- Stock-based mutual funds
Matt warns that mutual funds are not a sure bet:
The first thing you need to know about mutual funds is that there are literally thousands of them; 90% of them can’t even approach the returns of their related sector indexes, and many do not generate the good long-term returns required to justify their high fees. Unless you know exactly what you are looking at you should stick to some basic rules of thumb when purchasing a mutual fund of any type.
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