Chapter 1 — Build the Foundation
A chapter that sorts out what investing actually involves, in three steps — giving each pot of money a job, setting your yardstick, and comparing the main products
Chapter 1 covers what you sort out before you pick a product. There are three things to settle: which money you invest, what you use to judge risk and return, and how the products differ. Leave these vague and every new product you learn about makes the decision harder, not easier.
What you'll learn
- The first thing to think about is the job each pot of money has, not a product name.
- Keep money you will not touch for years separate from money you need soon.
- Risk is not "loss" — it is how much the price swings and how hard that makes it to keep holding.
- Diversifying is not about removing risk; it is about reducing concentration.
- Each product has a different source of return and a different way its risk shows up.
The three pages in this chapter
What Chapter 1 does
| Page | The question it answers | What you can do after reading |
|---|---|---|
| 1-1 What does investing actually involve? | What am I aiming for, by when, and how much | Give each pot of money a job, and work from the goal back to the product |
| 1-2 Risk and return | What should I use to judge return and risk | Understand the risk behind a high return, and what diversifying is for |
| 1-3 Risk and return of the main products | What actually differs between products | Compare the main products on one set of axes and decide how you want to hold them |
Read 1-1 onward and you will have the yardstick you need before Chapter 2 goes deeper into equities.