I talked about, in my previous blog entry, about how it’s important to understand the ‘destination’ (what you are looking to achieve with your money) as opposed to focusing, as many on of us do, on the vehicle (the financial product designed to help us get there). This is part 2 of investment rules of thumb.

However there is no denying that your need some sort of vehicle to help you achieve your goals.  So, let’s move onto my next tip when selecting the most appropriate vehicle…

“If it sounds too good to be true…..it probably is!”

I mentioned in the earlier blog that there is a massively wide range of options available when it comes to investing your money.

All of the options have pro’s and con’s.

They all contain Advantages and disadvantages.

They all include ‘good bits’ and ‘bad bits’.

When it comes to investing our hard earned money we do it because we want our money to grow – that’s potentially the good bit.  However this potential growth always goes hand in hand with the down side.  The fact that you need to take a degree of risk.

The amount of risk depends on the investment.  However if you’re not fully aware of the risks involved in a particular investment….you shouldn’t invest.

It’s also important to point out that there are investments out there which come with ‘guarantees’.  But be under no illusion, these guarantees come at a cost usually through higher charges than a product without a guarantee or a cap on the returns you can achieve.

This doesn’t mean that products with or without a guarantee are right or wrong.  It just means it’s worth taking some time to understand the positives and negatives, the risks and potential rewards, of any potential approach you should look at.

So. If you’re thinking about investing and understand the potential benefits but the risks aren’t clear.  Don’t invest.

If you’re being told that there are ‘no risks’ or there are ’guarantees’ without it being clear what the downside is (be it the fact that you are paying for the guarantee, the guarantee has limitations or the guarantees reduce the potential return). Don’t invest.

However if you fully understand both the potential rewards and risks associated with a particular type of investment and you’re comfortable with taking that level of risk and you feel the risks are worth taking for the potential reward there is some value in exploring further whether that particular investment might be right for you.

In the next blog entry I’ll talk about my third investing rule of thumb and remind you of a lesson learned from my Nan.