Prerequisite

One of my buddies has been excitedly spouting off about how amazing his new investment strategy is. I'm not going to demean this type of investment in this post, specifically, but it's relevant for me to note that I despise everything about it. While many people love it, I think it's hot garbage.

"What makes you like it so much?" I asked him.

"Well, I don't understand all the particulars, but it sounds like it should get me a really good return!"

"How does it make you money?" I responded.

"I'm not exactly sure, but I heard it has something to do with ______."

"How much have you invested in it?"

"About $20,000, and I'll put another $700 into it every month going forward."

Again, I think this product is one of the biggest piles of trash on the market. I wouldn't invest my worst enemy's money into it. However, that's not the point. We can agree to disagree. My problem with the entire situation is that my buddy is investing in something he doesn't understand. He was literally clueless......which is the issue. Understanding the product should be a prerequisite to investing in it. That should be the bare minimum. Even if we don't know all the ins and outs, we must be able to explain it at a moderate level.

I constantly beat on the drum of simplicity, and this topic falls into that camp. If we're doing things with our money that we don't understand, that, by definition, isn't simplicity. There have been lots of investment opportunities cross my desk that, on the surface, seemed attractive. However, if I can't understand it, I pass. If I can't explain to someone else how it works, I'm out. Life is too short to get over our skiis and not fully understand what we're getting ourselves into.

Perhaps that means we need to simply say "no." Alternatively, it might mean it's time to educate ourselves. Here's one fun example. One of my clients is a soon-to-be first-time homebuyer. She doesn't know much about the process, and is intimidated by the mortgage component. Wanting to embrace this idea of understanding what we're doing with our money, she's been absorbing information in an attempt to better understand it. She recently fed her draft loan documents into ChatGPT and asked it to explain them to her like she's twelve. Brilliant! It triggered lots of good follow-up questions and considerations. By the time she closes, she'll have a solid basic understanding of what she's getting into. A prerequisite, if you will.

Whatever funky stuff you come across in your life, I strongly encourage you to pass if you don't understand it (or sincerely spend the time and energy to educate yourself). Life is too short, and if it sounds too good to be true, it probably is.

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