I didn’t start out as a finance expert but I did have an advantage. As a scientist I had been trained to interpret data and question assumptions. I also had related interests which later led to an MBA and new directions in my career. Unfortunately, most people are not as protected when they first start to learn about investing.
Talking to friends and family today; it often stands out to me just how little many of them understand about the basics. These are intelligent people who often find themselves completely confused when trying to figure out how to invest their money. Remembering back to when I was first starting out, it’s not hard to understand why.
When I was starting my career and looking to start investing, I received very little good advice about how to invest. The big turning point was when I went in and talked to an “expert financial advisor” at a local bank. I was immediately peppered with complex descriptions of many different financial products, dire warnings about the consequences of trying to go it alone, and a portfolio of “investments that were exactly what a young fellow starting out needed.”
The conversation changed quite a bit when I took a few minutes to skim the mountain of data and fine print and I had been handed and then start to ask some questions of my own; including some rather sharp ones on all the fees I saw peeking out here and there. The conversation ended quickly once I turned my eye to the “performance” charts and dissected out the various tricks and traps that had been used to generate the impressive looking hypothetical returns for their particular brand of snake oil.
After this experience, I realized it was up to me to learn whatever I needed to. After learning enough to separate the real information from the sales pitches, the rest was much easier. Getting those first few basics together is the major hurdle for most people. From my personal experience and what I have found from talking to others, below are the crucial three concepts to understand:
The importance of time and compounding.
This explains why it is important to start early and not put it off until “later.” Also, understanding the long term rewards helps in planning and is the key concept to helping determine what risk you are comfortable with.
The risk/reward trade off and what “risk” really is.
Truly understanding the many types of risk is important for financial self defense. Simply stuffing your money under the mattress won’t protect you, you have inflation risk! Knowing how greater returns are linked to greater risk will help you determine when it is okay to take a little more risk or when you need to be more conservative. Most importantly, this protects you against the sales pitches. If it sounds too good to be true, it usually is.
How assets perform long term and how diversification works.
This final concept is important to not only create but to maintain a properly diversified portfolio. Otherwise, it can be very difficult to take the important but counterintuitive step of selling recent winners to buy recent losers.
Choosing the platform where you invest your money in is one of the important things that you need to pay attention to. Nowadays, there are several instruments where you can grow your money. But you have to be smart and strategic. Immobilien is one of the best ways to invest.
After you understand these, the rest is relatively easy. You need to know what the types of accounts are 401(k), IRA, Roth, etc. As this is all tax related, it can be very confusing but the benefits can be explained clearly and there are many resources to help. The next key step is to learn specifically how to set up and diversify your investments using low cost index funds. If you understand the three concepts above, all you have to do here is find a reputable company, open an account, and pick your allocation. Finally, the most important skill is just to know where to get help when you need it. There is a wealth of resources available ranging from personal finance blogs to articles in news sources such as Yahoo! Finance or even an introductory course at a community college. The first step is the hardest, after that you find that a little knowledge goes a long way.