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With the advent of the Internet and a plethora of financial news publications and television networks, there is an amazing amount of information available on investing and investments.  With that being said and obvious, why would you even read this?  Well, as I have said before, knowledge is power!  Now take a look at that cliché again but more closely.  Could you substitute the word information for knowledge?  Would it mean the same thing?  I am hoping you say that the answer is a resounding No.  Having access to information and having a lot of facts can be a detriment in some respects actually.  Is that how it feels with individual investing from your perspective?  You could spend months searching terms on the web, going to mutual fund websites, reading academic studies, keeping up with the current market moving news, and researching individual companies.  Would that really help you?  On any given day, you can find financial market professionals telling you that the stock market is poised for a huge correction, a lot of upside, or will trade sideways for the foreseeable future.  If you are waiting for someone to divine some wisdom for you in terms of when to invest and what to invest in, you will be waiting for many, many years.  Knowledge is taking information and constructing a framework that is actionable.  For those of you who have been reading my posts regularly, you may still want to read on because I will try to provide some structure around my past commentary.

My recommendation to you is to read the following information in pieces.  Pick one or two items off the list to read per day.  It will take you a week or so to digest all the material.  I encourage you to go back to a number if it does not make sense at first.  You can feel free to skip certain numbers if you are familiar with the concept already.  Let’s begin our discussion.

1)      Learning how to invest in the financial markets can feel very overwhelming.  I used to work on Wall Street, and I felt that same way and I lived it every day.  When you are just starting out, I cannot imagine how it must feel.  Especially when you are retired or going to retire soon.  I started in 1987, so it is hard to think back that far and truly remember.  If you need to live on your “nest egg” and do not want to work again, where do you even begin?  Remember I mentioned that finding information about the financial markets, different investments, ideas about portfolio construction, investing strategies, withdrawing funds during retirement, or accumulating wealth is quite easy using your PC or smartphone.  The problem is that, since we live in a 24/7 news-driven society and investment world, the advice provided on any given day will change.  That is why I suggest that you never make rash decisions and adjust your entire portfolio based upon one day’s news.  For more information about that concept, please refer to this link:  https://latticeworkwealth.com/2013/08/04/todays-news-should-prompt-you-to-adjust-your-entire-investment-portfolio/.

 

2)      Since investing in the stock market seems so intimidating and can feel like gambling, why would you even consider learning about the financial markets?  The funny thing is that if you leave these decisions in the hands of a financial professional you will be spending hundreds of thousands of dollars.  Well, you might say that I do not have millions of dollars, so that does not apply to me.  The financial services industry sure makes it seem that way.  However, are you making $40,000 a year and saving 5% of your paycheck in a 401(k) or 403(b) retirement plan?  That equates to investing $2,000 per year.  If your answer to that question is yes, then the hundreds of thousands of dollars applies to your as well.  For information on how investment advisory and asset management fees add up, please refer to the following link:  https://latticeworkwealth.com/2013/07/11/is-learning-about-investing-worth-it-how-about-224000-or-320000-worth/.

 

3)      Once you start to think about the money you stand to earn from investing in the financial markets and by avoiding excessive fees, I am hopeful that you will be motivated to learn more.  The next thing to consider is what types of investments you would like to purchase.  Essentially the question is how to build an investment portfolio.  How should you allocate your investments?  Which asset classes or sectors are the best to choose from?  Before you can tackle that issue, you should look at more general portfolio construction concepts.  You can find the link here:  https://latticeworkwealth.com/2013/07/16/how-to-create-an-investment-portfolio-and-properly-measure-your-performance-part-1-of-2/.

 

4)      Before you go any further, you need to learn how to assess your risk tolerance.  Your risk tolerance is just a fancy way to characterize your willingness to experience financial losses.  The stock and bond markets are volatile.  If the financial markets only went up, there really would not be too much of a story to write here.  In order to earn higher returns, you generally need to be able to accept higher risks.  The most important thing to learn here is that gain and losses are not proportional.  The proper term is symmetrical.  What do I mean by this?  If your stocks go down 50%, they need to go up 100% for you to break even.  It works for smaller amounts as well.  So if your stocks go down 10%, they need to go up 11.1% before you have the same amount of money.  If you are listening to the commentary on the financial news stations or reading “dire” predictions in the newspapers about a 10% drop in the stock market being very possible and probably, what will you do?  If you want to avoid that drop and could not bear to not sell before that decline, you have a very low risk tolerance.  In fact, if you view the financial markets in that way, you probably should NEVER have more than 50% of your portfolio in stocks.  If you are worried about a bear market occurring (bear market is defined as a 20% or more drop), you probably should either not have any stocks or invest no more than 20% of your money in the stock market.

 

Have you ever heard that from your financial professional?  Probably not.  The reason you need to set a realistic risk tolerance is that it will save you a lot of money down the road.  Now it is not simply that you will be taking the chance of losing nearly 40% as in 2008.  The problem is that investing is much too emotional the lower your risk tolerance.  For example, many individual investors sold all of their stocks toward the end of 2008 and beginning of 2009.  In fact, many wealthy investors still have 30-40% of their portfolio in cash today.  The S&P 500 bottomed at 666 in March 2009 and now trades around 1650 as of August 20, 2013.  If you get back in today and sold then, you missed out on over 100% of gains, and you are setting yourself up to sell again if the market goes down more than you are comfortable.   Most people know that you should “buy low and sell high” intellectually. However, the average investor will “buy high and sell low” in practice because emotions take over during periods of market volatility.  For more information about how stock market fluctuations affect your investment portfolio, please go to this link:  https://latticeworkwealth.com/2013/07/08/double-edged-sword-of-the-power-of-compounding/.

 

5)      Once you understand how different annual returns affect the value of your portfolio, you can start learning about how well you are doing and how to set a realistic target return for your portfolio.  The first thing to do is to learn about the difference between active and passive investing.  Active investing is selecting individual stocks and bonds that are likely to do better than the market.  Passive investing is selecting different types of stocks and bonds in different categories and then building a portfolio.  There is a third, emerging category which too many say is passive investing.  It is called enhanced indexing.  Enhanced indexing is really a hybrid approach.  You select certain stocks or bonds within an index based upon certain qualitative analysis.  Enhanced indexing is not passive and is not active.  The most common mistake is to confuse it with passive investing.  Once you start selecting specific securities, you are essentially being an active investor.  For a longer discussion of the difference between active and passive investing, you can refer to the following:  https://latticeworkwealth.com/2013/07/05/difference-between-active-and-passive-investing/.

 

6)      I would never assert that active or passive investing is better.  You have to learn more about investing in order to make that determination.  However, I will say that you need to ensure that your chosen investing approach is working.  If you are choosing an active approach, your investment portfolio should be beating the market over the long run.  If it does not, why would you spend all the time searching for ways to beat the market?  You could just throw your hands up and simply choose to invest your money in all the stocks or bonds in the various indexes.  So how do you measure your investment performance?  It is not as simple as comparing the performance of your stocks to the S&P 500 index and bonds to the Barclays Aggregate Bond index.  That might have been the way to do so twenty years ago, but the “smart” money does not do that anymore.  Think of it in this manner:  will an Olympic sprinter beat the faster runner in your neighborhood?  Probably.  Will the fastest runner in your neighborhood beat the fastest person in my neighborhood if they run the same distance?  Now that is a much harder question to answer.  Refer to this link to understand more about how to properly measure the investment performance of your portfolio:  https://latticeworkwealth.com/2013/07/19/how-to-create-an-investment-portfolio-and-properly-measure-your-performance-part-2-of-2/.

 

7)      If investing is starting to sound boring, it can be in a certain sense.  If you are looking to make 100% per year by buying stocks, you are going to be sorely disappointed.  It can seem so easy when you watch TV shows.  Why didn’t I buy NetFlix (NFLX) or Best Buy (BBY) a couple of months ago?  I could have doubled my money and then some.  You also can lose a lot of money.  I used to own Best Buy five years ago.  I purchased the stock at an average cost over $40.  The stock is up around 180% in 2013, but it is down more than 20% from where I bought the stock over five years ago.  If I had not sold my stock in Best Buy, I would still be losing money.  So even with the winners of today, you can lose money in the future.  Additionally, it is not as easy as it seems to pick individual stocks.  The real pros spend hours upon hours learning about a particular company prior to buying the stock.  How much time?  You can take a sneak peek, but I will warn you that you will most likely be asleep long before you reach the end of this article:  https://latticeworkwealth.com/2013/08/09/you-purchased-a-stock-now-what/.

 

8)      After reading all this information, it may seem like it is better to let a financial professional manage your money.  I mean you have many other things to do with your limited leisure time.  With that being said, you need to understand what you are really paying for.  If you are going to a financial professional to seek advice, you should know why you are going.  What can’t you do yourself?  Here is a unique way to think about this topic:  https://latticeworkwealth.com/2013/08/07/are-your-financial-advisors-fees-reasonable-here-is-a-unique-way-to-look-at-what-clients-pay-for/.

 

9)      If you still think that going to a financial professional is the best option for you, I will not fault you for that.  No matter how much time you spend learning about investing, there will always be uncertainty and more questions.  However, you need to have a plan of attack when interviewing any Financial Advisor.  What types of questions should you ask?  Here is a suggested list of questions:  https://latticeworkwealth.com/2013/08/12/important-list-of-questions-to-ask-when-selecting-a-financial-advisor/.

 

10)   Another important thing to keep in mind once you start to feel comfortable with a financial professional is that you should get to know their background.  I am not referring to the number of years they have been investing or their educational credentials or professional designations.  You will find that most financial professionals are biased based upon the time when they first started the profession.  Therefore, their advice might be “stuck in time” so to speak and not apply to your situation.  For a more detail explanation of this idea, you can refer to this post:  https://latticeworkwealth.com/2013/08/18/before-you-take-any-investment-advice-consider-the-source/.

 

 

11)   The other thing to remember, and sometimes the most important, is that you have an advantage over most financial professionals.  You do not follow the markets daily.  Plus, you have different experiences and expertise in everyday life.  You can be more objective when it comes to investing and how the financial markets work.  You can choose to be like Warren Buffett’s trusted advisor, Charlie Munger.  Want to learn more:  https://latticeworkwealth.com/2013/08/11/why-did-i-choose-to-include-latticework-in-my-investment-firms-name-well-because-of-charlie-munger-of-course/.

 

12)   Do you keep hearing that higher interest rates are going to wreak havoc on the financial markets now and for years to come?  It is a common topic, especially since most asset managers believe that interest rates have bottomed earlier this year and are headed higher over time.  We had 30+ years of interest rates going lower.  It was bound to happen that interest rates would inevitably go up at some point.  Should you not start investing until interest rates stabilize?  What if interest rates are going to continue to rise?  These are important questions, and I try to answer this question in the following post:  https://latticeworkwealth.com/2013/08/14/what-can-investors-do-in-a-rising-interest-rate-environment/.

You have finally reached the end of the list.  Do you feel smarter?  I sure hope you do.  My goal was to provide you with a framework to start your quest.  If you would like to learn more, I have a recommended reading list.  It will most likely take you 20 hours or so to read these books.  However, if you can save hundreds of thousands of dollars, would you say it is worth it?  Here is the list:  https://latticeworkwealth.com/2013/07/23/spend-20-hours-learning-about-investments-to-prepare-20-years-of-retirement-2/.

Please feel free to send me your comments or other questions at latticeworkwealth@gmail.com.  You can post them directly on my blog as well.  If there are questions beyond the scope of this discussion, I will certainly address them in a future post.  I encourage you to take a look at some of my prior posts as well which are not included in this discussion of how to begin your “career” as an individual investor.

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