Before investing your money in something, you should learn more about the first pillar of investing: theory.

Start with understanding the relationship between risk and return. By and large, investments with higher returns come with higher risks. For example, stocks usually give higher returns over time, but their value can also drop suddenly. On the other hand, safer investments like government bonds offer lower returns but are less risky. This knowledge lets you make better choices based on your goals and risk tolerance.

Continue your discovery of investment theory by learning about MPT, which stands for the Modern Portfolio Theory. Created by Harry Markowitz, it proves that by carefully choosing a mix of different types of investments, investors can get the best return for the amount of risk they’re willing to take. Here, you should know what diversification is. Being a major part of MPT, diversification means not putting all your money in one place. For example, you could mix stocks and bonds to reduce risk.

Another crucial concept in investment theory is the Efficient Market Hypothesis (EMH). Simply put, all known information is already included in stock prices. When you try to “beat the market” by picking the right stocks or timing the market, you take up a challenging, if not impossible, task. Thus, passive investing may be a smarter and cheaper strategy. Consider using index funds that follow the whole market.

William Bernstein explains that nobody can truly predict the market and be safe all the time. Even so-called experts or strategists often pretend they know where the market is going, but they actually don’t. This shows that trying to beat the market is usually futile. Is there anything you could do about it?

Use the knowledge of investment theory. First, you should decide on how much risk you can handle. Second, don’t concentrate on just one type of investing. Instead, diversify and look into stocks, bonds, and real estate to lower risk. While diversifying, look for good returns with low fees, such as exchange-traded or index funds. Finally, remember that the market is constantly changing, but you have a plan and must stick to it. Therefore, rebalancing your portfolio must become your habit.