Ramit Sethi Says There Are 3 Non-Obvious Signs of a New Investor. Do Any Apply to You?

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  • Ramit Sethi says new investors often get confused about expensive purchases versus good investments.
  • New investors often don't understand how you know future returns will continue to be 7% to 8%.
  • New investors often recommend investing books they may not ever have read.

Could these signs suggest you have more to learn about investing?

Investing money is a good thing. If you can put some cash into a brokerage account and buy assets that will help you earn positive returns, you can grow your wealth much more easily than if you must earn every dollar yourself.

When it comes to investing, everyone must start somewhere -- which means everyone is a new investor at some point and there's nothing wrong with that. While it's actually a good thing to be a new investor, what you don't want to be is an uninformed investor.

Finance expert Ramit Sethi recently outlined three non-obvious signs of a new investor. If any of these signs apply to you, you may want to do a little bit more research to make sure you're on the path to making sound investments that will help you end up with a big bank balance.

Here's what Sethi says are the signs of a new investor

On Twitter, Sethi explained three non-obvious signs that someone may be new to investing and not yet have the knowledge they need to make sound choices.

The first relates to confusion over what an investment actually is. Specifically, Sethi says someone is likely to be a new investor if they say "handbags are actually good investments!"

While Sethi says you should absolutely buy an expensive bag if you want to do that, you shouldn't assume that costly purses are a good investment just because they happened to cost a lot of money.

"Yes, sometimes handbags can turn out to be great investments, but no savvy investor would say this," he said. "If you want to buy an expensive bag, great! If it turns out to be a great investment, great! But don't confuse the two."

Second, Sethi said another sign of a new investor is not understanding why and how past performance can be predictive of future returns. Specifically, he says you might be new -- and less informed than you should be -- if you ask "how do you know investment returns will continue at 7%-8%?" Sethi says this is a problematic question because it is "covered in investing 101."

Finally, Sethi said the last big sign of a novice investor is recommending a particular investment book called The Intelligent Investor. The issue isn't so much the book itself, but rather the fact that Sethi believes anyone recommending this book to an investor likely hasn't actually read it at all. And this is a problem because, "You can tell a lot about someone's level of expertise by the books they recommend."

Do you need more investing knowledge?

If you recognize yourself in any of these signs Sethi has outlined, you don't need to be discouraged that you may not know as much as a seasoned investor yet. You just need to make a point to realize what you don't know.

The good news is, you don't have to be an expert investor to make money in the market. You can adopt a simple strategy like investing in index funds that track the performance of the market and do pretty well. If you want to become a more sophisticated investor, though, make it a point to start learning more so you can avoid rookie mistakes and make decisions likely to pay off for you in the end.

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