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I sold a house which I inherited from my mother. I wish to invest the proceeds from the the house, but I know absolutely nothing about investing.

Suppose that I were to ask the following question:

"How can I tell the difference between a terrible investment and an investment which will probably break-even?"

Such question a question on money.stackexchange would be closed within an hour for being too subjective. Therefore, I will not ask that question.

I will note that I cannot tell the difference between the world's worst investments and the world's best investments. If you do not offer your opinion to a child about whether eating a river pebble is a good idea or not, then a sufficiently young child will no basis on which to base a decision on whether to eat a rock or not.

If you cannot offer your subjective opinion about what investment is better than another, then I will choose an investment more-or-less at random, and lose 95% of all of my liquid assets.

As a metaphor, I might be asking, "What is the difference between a very rotten apple and an apple which is, at least, somewhat okay?"

I have no idea how money works other than the fact that I sometimes use money to buy groceries, clothing, etc... Also, I know that whenever I take a job, I receive some money on an hourly basis.

In order to convey to you the full magnitude of my ignorance, I will provide a list of terms in finance terms, which I do not know the meaning of.

I do *NOT expect you to explain what the terms mean, but I do hope you will write an answer which only uses every-day English.

Examples of Terminology Which You Should Not Use in an Answer to This Question, Without Defining Them, Because The Terms are Not in the Vernacular of a Lay Person

  • Bear market
  • Bull market
  • Asset class
  • Domestic stock
  • Total market index fund
  • Core fund
  • Annuity
  • International stock funds
  • Brokerage cost
  • Brokerage firm
  • Mutual fund
  • ETFs
  • Asset allocation
  • IRA
  • The Prudent-Person Rule
  • Short-selling treasuries
  • Borrowing on margin
  • 401(k)

Can you explain, in layman's terms, the difference between a scam, and a legitimate investment, even if the investment has a very low rate of return?

Michael Butler
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    Examples of Terminology Which You Should Not Use in an Answer to This Question, Without Defining Them, Because The Terms are Not in the Vernacular of a Lay Person. I would suggest that you attempt to become more financially literate rather than attempting to constrain people from using necessary financial terms to answer a question properly. In order to convey to you the full magnitude of my ignorance, I will provide a list of terms in finance terms, which I do not know the meaning of. Google is your friend. – Bob Baerker Jul 03 '21 at 20:46
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    "I cannot tell the difference between the world's worst investments and the world's best investments." Nor can most people; Bernie Madoff scammed very smart people out of billions of dollars for decades. The general advice for folks like you is "invest in an index fund"; if you're unwilling to deal with terms like "mutual fund" in people's answers you shouldn't really be making any investment decisions more complicated than that. – ceejayoz Jul 03 '21 at 21:52
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    My answer will be two sentences. "It's very complicated. Consult a qualified financial advisor." – DJClayworth Jul 04 '21 at 02:00

1 Answers1

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The simplest answer I can think of it is that if you invest in something that you buy via a large, reputable financial institution (e.g., Vanguard, Fidelity), you can be pretty sure it's not a scam.

I must hasten to add three important provisos:

  1. Just because it's not a scam doesn't mean it's automatically a good idea. Some non-scam financial products may be much better than others. (In particular, some companies may charge you higher fees than others.) It's not like everything is either a good investment or a scam; there's a wide range of investments that are basically legitimate but not a good idea for many people.
  2. Just because it's not from a large, reputable financial institution doesn't mean it is a scam. There are plenty of other legit investments out there.
  3. If you "know absolutely nothing about investing" it is still possible that you will make a costly mistake. You should probably try to learn at least a little.

If you set up an account with an institution like Vanguard and buy into something like an S&P 500 index fund or total stock market index fund (even without knowing what those terms mean) there's almost no chance you'll get scammed. (The chance is never zero, as there could always be a rogue employee embezzling funds or a Wells Fargo-style attempt to trick you into agreeing to something you didn't intend, but it's going to be very low.)

Keep in mind that that is sort of like saying if you go into McDonald's and order a hamburger (even without knowing what a hamburger is) you will probably not be poisoned. It is true that you will probably not be poisoned. However, on the one hand, it still may not be healthiest meal you could get, and on the other hand, it doesn't mean going to McDonald's is the only way to avoid poisoning. Also, if you go into McDonald's knowing nothing about their menu you may accidentally waste your money on something you don't want.

Overall if you're going to invest a large amount of money it's probably a good idea to read up and get at least a bit of basic education on financial matters rather than trying to look for "one weird trick" that will let you allocate your money blindly without understanding what you're doing. It's not necessary to become an expert by any means but a bit of knowledge can be helpful.

BrenBarn
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    FWIW, anyone doing business with a broker that is a member of SIPC is covered for embezzlement, theft of securities, etc. by SIPC insurance (citizens and non residents). – Bob Baerker Jul 03 '21 at 23:45