The most dangerous investment does not invest in hedge funds or even in derivatives. Although very risky, investing in penny stocks or day trading is not the most dangerous investment. There is no investment in gold or other commodities. Investing in emerging markets that focus on countries with unresolved governments is quite risky, but it still doesn’t top the list.

All of the above have something in common – there is one chance of success, albeit very small in some of them. The most dangerous investment has no chance of success. It just doesn’t invest at all. I don’t see money market accounts (MMAs) and CDs as investments. They are just another form of cash. With MMAs and CDs, your best scenario is likely to be to keep up with inflation.

Before you invest, here are some things to consider:

  1. Do your homework before you turn your money over. When entrusting your money to someone else, make sure that they are a licensed and registered investment professional. In the US, you can use BrokerCheck to check the background of your investment professional.
  2. Understand what you are investing in. If someone can’t explain the investment where you quickly and completely understand how it works, then you shouldn’t invest in it.
  3. Make sure the investment meets your needs. Understanding an investment is not enough. I understand how many investments work, most of which I would never invest in because they are outside of my defined long-term strategy.
  4. Diversify based on a solid asset allocation model. Never put all your eggs in one basket. Spread your risk across industries, companies (size and type), and types of investments. Never invest more in any security than you can afford to lose.

The US Securities and Exchange Commission (SEC) has a wealth of information for investors. One point you may find useful is “Questions to Ask About Your Investments”. Not only is it good for new investors, but it’s also a good reminder for those of us who have been around a couple of times.

Full Disclosure: No position in the above securities.

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