Disclaimer
The information provided in this series is for educational purposes only and does not constitute investment advice. The University of Illinois System Student Money Management Center does not endorse or promote any specific investment products, financial institutions, or investment strategies. Individuals should conduct their own research and consult with qualified financial professionals before making investment decisions.
Have you always wanted to invest but found it scary on some dimension? Maybe you feel like you don't know enough, or you're not prepared enough, or it's all too risky. Or maybe you just think: WHAT IS GOING ON?
We get it.
In this mini-series, over three blog posts, we're going to talk about the basics of investing. By understanding how different types of investments carry different levels of risk, you can figure out for yourself what sort of investing is most appropriate for your situation, including your goals, timeline, and comfort level.
Key principles to keep in mind:
- Past performance does not guarantee future results
- Risk is inherent in all investment activity
- What works for one person may not be appropriate for another
Ready to demystify investment risk? Let's dive in.
Create Your Financial Plan First
Before you start investing, you need a solid financial foundation. Think of this as building a house. You wouldn't start with the roof before you've poured the foundation, right?
First, set clear financial goals with timelines. Are you saving for a down payment on a house in three years? Retirement in 40 years? A car next year? Different goals require different strategies.
Second, assess your current situation. Take an honest look at your income, existing debt, and assets. You can't plan your route if you don't know where you're starting from.
Third, build emergency savings. Aim for 3-9 months of expenses in a readily accessible account. This cushion protects you in case unexpected expenses pop up. Want some tips on how to get started? Check out our blogpost, "Emergency Mode: Why You Need a Rainy Day Fund" (Sahil Shimpi, 2025).
Fourth, pay down high-interest debt before investing. But what counts as "high-interest"? This is a moving target that changes with the economy. A helpful benchmark is the 30-year fixed mortgage rate. (Federal Reserve Bank of St. Louis, 2026). If a debt carries a higher interest rate than that, it's generally considered high-interest. As of January 2026, the average 30-year fixed mortgage rate hovers around 6%, so debt with interest rates above that threshold, such as most credit cards, should typically be prioritized for repayment before you start investing.
But why does all of this matter? Investing should enhance your financial plan, not jeopardize your stability. If you invest before handling high-interest debt or building emergency savings, it might be more difficult to respond to a financial curveball life unexpectedly throws at you.
Diversification and Time as Your Greatest Advantages
When it comes to investing, you have two powerful tools on your side: diversification and time. Let's break down why these matter so much.
The Magic of Diversification
Diversification means spreading your investments across different types of assets, sectors, and even geographic regions. It's the classic "don't put all your eggs in one basket" advice—if one investment performs poorly, others might balance it out.
Ready to dive deeper into diversification?
The Power of Time: Compound Interest
Compound interest is when your money earns returns and then those returns earn returns. This creates a snowball effect over time. The earlier you start investing, the more time your money has to grow exponentially.
While saving cash is important for your emergency fund, keeping all your money in savings accounts means it's actually losing value over time due to inflation.
Purchasing power is the amount of goods or services your money can buy. As prices rise due to inflation, each dollar buys less than it did before. For example, if inflation averages 3% per year, something that costs $100 today would cost about $103 next year... meaning the $100 saved under your mattress now buys 3% less stuff.
Since savings accounts pay very little interest to account-holders*, investing is the only strategy available to try to beat the costs of inflation so that your purchasing power doesn't degrade as you save for the future.
*As of January 2026, the average national deposit rate for savings accounts was 0.39% (FDIC, 2026). Between 2014-2024, the average inflation rate in the US ranged from 0-8% (World Bank, 2026).
Want to learn more about inflation and purchasing power?
Your time horizon is how long you have until you need to access your invested money. The longer your time horizon, the better you can weather volatility—whether that's market ups and downs or unexpected changes in your own life. If you're investing for retirement 30 years away, a market dip today is much less concerning than if you need that money next year.
Want to learn more about compound interest?
Understanding Risk in Investment Activity
Different saving and investing tools come with different levels of risk and different potential returns. Here's a general breakdown:
The Risk-Return Spectrum
Low risk/low return: Savings accounts, Certificates of Deposit (CDs), money market accounts
- Your money is safe and accessible (or locked in for a set period with CDs) if in an FDIC (FDIC, 2024) or NCUA (National Credit Union Administration, 2025) account up to $250k per person on the account
- Returns are modest but predictable
Moderate risk/moderate return: Bonds (government, municipal, corporate)
- You're essentially lending money to a government or company
- More stable than stocks, but can still fluctuate
Higher risk/higher return: Stocks, mutual funds, ETFs (Exchange-Traded Funds)
- Potential for significant growth over time
- Can experience substantial ups and downs
Dialing Your Risk
Remember diversification and time? These are your dials for adjusting risk. A longer time horizon lets you take on more risk because you have years to recover from market downturns. Diversification, that is to say spreading investments across different assets or "asset allocation", helps cushion against any single investment tanking.
Here's the important part: Personal risk tolerance varies wildly. Your age, financial goals, timeline, and overall life context all play a role. What one person considers acceptable risk might keep you up at night. That's completely okay as there's no one-size-fits-all approach.
A Word on Speculative Investments
Speculative investments, like how some people view crypto assets and meme stocks, tend to carry higher risk than traditional investing, though the nature of that risk can vary significantly.
Crypto assets are known for their volatility (Bakas, Magkonis, & Oh, 2022). Prices can swing dramatically in short periods, which means potential for both big gains and big losses.
Meme stocks are trickier to categorize. The term itself just means a stock that gained popularity through social media (Wikipedia, 2022). Here's where it gets important to understand how you're investing:
- Short-selling (Wikipedia, 2025) has unlimited risk potential. When you short a stock, you're betting it will go down. If it goes up instead, your losses can theoretically be infinite. This is why meme stocks promoted for short-selling could be catastrophic for short-sellers.
- Buying stock the traditional way (going "long") limits your risk to what you invested. If you bought $25 worth of stock in a solar energy company you discovered on Reddit or TikTok, your maximum loss is that $25. The stock's value could go to zero, but you can't lose more than you put in.
What matters is understanding what you're buying, how much you're investing, and what kind of risk you're taking on.
Want to dive deeper into the difference between investing and speculating? Check out Investopedia's guide on investing vs. speculating (Nguyen & Rheinhart, 2019).
Want to learn more about short-selling and meme stocks? Check our podcast episode that covers both topics (Student Money Management Center, 2021)!
Protecting Yourself from Fraud
Regardless of your risk tolerance, protecting yourself from fraud is essential. Here are the major red flags:
🚩 Guaranteed returns or "no risk" promises Remember: risk is inherent in all investment activity.
🚩 Pressure to invest immediately Legitimate investments don't come with countdown timers.
🚩 Returns that seem too good to be true A "guaranteed" 20% annual return? For context, the long-term stock market average is around 7-10% annually—and that's not guaranteed either.
🚩 Lack of documentation or unwillingness to answer questions Legitimate investments come with clear documentation and transparent answers. Overuse of jargon and buzz words without explaining what these mean can be used as a manipulation tactic. If you don't know what a term means, don't be embarrased to ask! This protects you and money.
🚩 Unregistered sellers or investments Investment professionals must be registered with regulatory bodies like the SEC,FINRA, and your state. Verify credentials through free tools like the Financial Industry Regulatory Authority's BrokerCheck (Financial Industry Regulatory Authority, 2019) or if you're in Illinois, IDFPR's license lookup tool (Illinois Department of Financial & Professional Regulation, 2026).
Trust your gut. If something feels off, it probably is. Do your research, ask questions, and verify credentials before investing.
Conclusion
Investing doesn't have to be scary when you understand the fundamentals. Here some things to remember.
All investments carry risk. It's important to know your capacity and tolerance. What's right for someone else may not be right for you, and that's perfectly okay.
Start with a solid financial foundation. Build that emergency fund and tackle high-interest debt before jumping into investing.
Time and diversification are your tools for managing risk. The longer your time horizon, the more volatility you can weather. Spreading investments across different assets helps cushion against losses.
Do your homework. Research investments, ask questions, and verify credentials.
Coming up next: In our next post, we'll dive into the difference between investing in the stock market versus crypto assets—what makes them different, and what you need to know about each.
References
Bakas, D., Magkonis, G., & Oh, E. Y. (2022). What drives volatility in Bitcoin market? Finance Research Letters, 50, 103237. https://doi.org/10.1016/j.frl.2022.103237
FDIC. (2024). Deposit Insurance FAQs | FDIC. Fdic.gov. https://www.fdic.gov/resources/deposit-insurance/faq
FDIC. (2026). National rates and rate caps – January 2026. FDIC.gov. https://www.fdic.gov/national-rates-and-rate-caps
Federal Reserve Bank of St. Louis. (2026). 30-Year Fixed Rate Mortgage Average in the United States. Retrieved from Stlouisfed.org website: https://fred.stlouisfed.org/series/MORTGAGE30US
Financial Industry Regulatory Authority. (2019). BrokerCheck - Find a broker, investment or financial advisor. Retrieved from Finra.org website: https://brokercheck.finra.org/
Financial Industry Regulatory Authority. (2024a). Asset Allocation and Diversification | FINRA.org. Retrieved from www.finra.org website: https://www.finra.org/investors/investing/investing-basics/asset-allocation-diversification
Financial Industry Regulatory Authority. (2024b). Learning to Invest. Retrieved from Finra.org website: https://cdn.finra.org/e-learning/diversification/story.html
Illinois Department of Financial & Professional Regulation. (2026). Elicense Online. Return to IDFPR. https://online-dfpr.micropact.com/lookup/licenselookup.aspx
National Credit Union Administration. (2025, May 20). Share insurance coverage. Share Insurance Coverage. https://ncua.gov/consumers/share-insurance-coverage
Nguyen, J., & Rheinhart, C. (2019). What is the Difference Between Investing and Speculating? Retrieved from Investopedia website: https://www.investopedia.com/ask/answers/09/difference-between-investing-speculating.asp
Owusu-Cyrus, R. (2025, February 6). How the rule of 72 can help you build wealth-or sink deeper into debt. SMMC News & Events Blog. https://blogs.uofi.uillinois.edu/view/7550/446933598
Pellegrini, A. (2024, September 24). Podcast: Cost of Living. Retrieved January 23, 2026, from SMMC News & Events Blog website: https://blogs.uofi.uillinois.edu/view/7550/131743671
Pellegrini, A. (2026, January 8). Set financial goals, learn compound interest, contribute to research. Webtools. https://blogs.uofi.uillinois.edu/view/7550/1094510034
Sahil Shimpi. (2025). Emergency Mode: Why You Need a Rainy Day Fund. Uillinois.edu. https://blogs.uofi.uillinois.edu/view/7550/1972738353
Student Money Management Center. (2022, September 28). blog posts Inflation: When Prices Rise - Get Savvy Webinar Recording. Retrieved January 23, 2026, from SMMC News & Events Blog website: https://blogs.uofi.uillinois.edu/view/7550/85812014
Student Money Management Center. (2023, September 20). Podcast: The impact of compound interest. SMMC News & Events Blog. https://blogs.uofi.uillinois.edu/view/7550/650946740
Student Money Management Center. (2026). Podcast: Inflation. Retrieved November 17, 2023, from SMMC News & Events Blog website: https://blogs.uofi.uillinois.edu/view/7550/825050424
Student Money Management Center. (2021, March 24). Podcast: Short-selling. https://blogs.uofi.uillinois.edu/view/7550/433822269
U.S. Securities and Exchange Commission. (2015). Beginners' Guide to Asset Allocation, Diversification, and Rebalancing | Investor.gov. Retrieved from Investor.gov website: https://www.investor.gov/additional-resources/general-resources/publications-research/info-sheets/beginners-guide-asset
U.S. Securities and Exchange Commission. (2026). SEC.gov | Office of Investor Education and Assistance. Retrieved January 23, 2026, from Sec.gov website: https://www.sec.gov/about/divisions-offices/office-investor-education-assistance
Vaidyanathan, R. (2022). Shrinkflation. Retrieved from SMMC News & Events Blog website: https://blogs.uofi.uillinois.edu/view/7550/771661501
Wikipedia. (2022, February 2). Meme stock. Retrieved from Wikipedia website: https://en.wikipedia.org/wiki/Meme_stock
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