Don’t Invest in Things You Don’t Understand

Don’t put money in any investment product you can’t explain to a seventh grader!  Never put money in anything you don’t understand!”

Dave Ramsey practically screams this advice on the new version of the Financial Peace University lesson on investing.  There is no uncertainty in his words or his voice.  Critics of Dave Ramsey, and even quite a few of his fans over at My Total Money Makeover message boards, say Dave’s investing advice is either “too simplistic” or just wrong.

To people who are much more investment savvy, Dave’s investing advice probably does sound wrong or oversimplified.  But for folks like me, who just don’t have much learning or background in investing, that is a start, as long as we follow his basic advice quoted above.  Perhaps Dave Ramsey’s critics would be mollified by the next quote:

Don’t put money in an investment just because an investment adviser told you to.  Don’t put money in an investment because Dave Ramsey told you to!  Never put money in an investment just because someone says it’s a good idea!  Make sure you understand the investment and can explain to a seventh grader why it’s a good thing for you!

‘But Dave, I NEVER buy anything I don’t understand…’

Riiiight, that’s why your DVD player’s clock is still blinking zero.

This is a little scary to my ears … Dave Ramsey has his bar set lower than the U.S. Army, which requires everything to be written on the eighth-grade level!  Although I guess my standard here is whether or not I can explain this to hubby, who has no true interest in investing, rather than my eighth-grade math-geekling son.  Joking aside, this is the absolute best advice when it comes to complex financial wranglings like investments.

There seems to be quite a bit of complex and convoluted investment products out there, too.  Things I cannot yet explain to the proverbial seventh grader would include annuities, stock options, puts and calls (no clue how those work at all), ETFs, and the differences between the types of bonds.

Basically, I only understand the concepts of single stocks, mutual funds, and various index funds right now.  At present, I only invest in a mutual fund for myself and one for my son, with a mutual fund company money market account for our emergency fund.

Right now I am trying to educate myself more on investing.  I get quite a bit of information online, although I take most of the advice online with a grain of salt.  I also get some information from my Edward Jones man.  I fully understand he works on commission, and he fully understands that if I feel he is pushing something that isn’t good for me I will walk out of his office.  The first time I met him I informed him his job was to educate me, and he said that actually makes his job easier in the long run.

The informed and educated investors aren’t in a panic right now, as the market leaps and tumbles like a gymnast.  In fact, a couple of the informed investors I know are buying when the market takes a nosedive like it did yesterday.  It sounds weird at first, but they explain that “the market is on sale.”

So what do these informed and savvy investors that I know buy as their investments?  Simple things like index funds or mutual funds!  Wait … shouldn’t they be into the complicated stuff, since they are more educated?  No, they say.

Keep it simple and understand what you are doing, they insist.  Complexity belongs in math homework, not investing, they explain.  Hmmm, if people who have investment portfolios worth more than 10 or 20 times my total net worth say to keep things simple and easily understandable, maybe I should listen.

So basically, Dave Ramsey has only two things to say about investing when you boil things down:

  1. When you get to Baby Step Four, invest 15% of your net income;
  2. Never invest in anything you don’t understand and can’t explain to someone else who isn’t investment-savvy.

Well now, that’s investment advice simple enough for even me to understand!  Implementing it seems a bit harder to do though, since investing is such a complicated topic.