Don't Invest If You Don't Understand

Meg put money into a Roth IRA last year. She saw a statement that said it had grown. How did it grow? Dave thinks she shouldn't put any more money into it unless she knows how it works.

QUESTION: Meg on Twitter put money into a Roth IRA last year. She saw a statement that said it had grown. How did it grow? Dave thinks she shouldn’t put any more money into it unless she knows how it works.

ANSWER: Don’t put any more money in that. Unless you know how something works, don’t ever put money in it. Don’t put money in something because I said to or because someone else said to. You need to either learn how it works or you don’t need to put any more money in it. You are scaring the crud out of me. This is how people lose their money. They put money in stuff they don’t understand because some guy told them to. Never do that. Never do that. Never do that.

How does it grow if it is in a growth stock mutual fund? In a growth stock mutual fund, there will be 90–200 different companies’ stocks. If some of them go down and some of them go up but the net effect is that the overall group is worth more today than it was yesterday, then you have made money on the overall group. You’re going to see that your $1,000, were you to cash it out of your mutual fund, would be worth—making up a figure—$1,100, which means you made 10% on your money, but that’s because the value of that group of stocks went up. That’s how it works. That’s where the growth came from, but don’t put money in something you don’t understand ever. Don’t ever put money in something you don’t understand.