How to Avoid Bad Investments

I hate the phrase, “good investment.” Investments are not good, bad, or evil. They just exist.

A friend asked me if I preferred stocks and index funds were a good investment. He had just finished reading Warren Buffett’s latest letter to his shareholders.

Now, you might be thinking that real estate, index funds, or gold are good investments. You might be thinking that Enron, Bernie Madoff, or Bitcoin are bad investments. Depending on the day, you would be right or wrong.

We judge investments on a scale of risk and return. They all lie somewhere between stuffing cash under a mattress and playing the lottery. Zero risk for zero return or huge risk for huge return.

Knowing what investments are good for you depends on your goals. You need to pick what’s right for you.

Pretend someone asks you if a hammer is a good tool. After your mouth falls open you ask, “Well, what are you working on?”

To figure out if a hammer is a good tool, you need to know what the job is. If two pieces of wood need screwed together, you could do it with a hammer. But a screwdriver is better.

If you are trying to decide what investments are good for you, consider some of these questions:

  • What day would you like to retire?
  • What monthly paycheck do you want all through retirement?
  • How much money can you save each month until you retire?
  • What return (%) do you need from now until retirement?
  • If you invest in “X,” will it grow enough to meet your goal?
  • Are you comfortable with that level of risk?

A good investment for someone else could be bad for you. When you understand your own goals, you will know what is good or bad for you.

What did I tell my friend? Well, I don’t plan to retire until I’m 60. He wants to retire at 30. What’s good for me is bad for him, and that’s just how it goes.