What You Need to Know to Invest

Understanding risk and how it relates to three different ways to grow your money is key.

Sarah Newcomb 24 December, 2019 | 10:12
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Why invest? Because every year, things cost more and more and more, which is why it’s so hard to keep pace with the cost of living if you’re relying on savings alone to build your nest egg. What cost $1,000 20 years ago costs more than $2,000 now, and in a couple dozen years, it will be double that. As a friend recently observed, “I remember when a truck cost $10,000. Now that’s the discount they advertise in promotions.”

Inflation may be better than deflation, but it’s still a pain in the neck. The tiny amounts of interest you can earn from savings accounts aren’t enough to keep up, so as weird as it sounds, saving your money is a guaranteed loss. If you want to grow your savings, you’ve got to invest it, and that means facing some hard trade-offs between risk and return.

The Booby Trap
You’ll hear a lot of people cite the rule-of-thumb “More risk; more return,” which is a simplistic misunderstanding of the risk-return relationship--and a dangerous mental booby trap. If higher risk always meant a higher return, then it wouldn’t actually be risk!

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About Author

Sarah Newcomb

Sarah Newcomb  Sarah Newcomb is a behavioral economist with Morningstar.

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