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? 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.
My recommendation to you is to read the following information in pieces. Pick one or two items off the list to read per day. You can feel free to skip certain numbers if you are familiar with the concept already. Let’s begin our discussion.
1) How the Current News Affects Your Investments:
Learning how to invest in the financial markets can feel very overwhelming. Especially when you are retired or going to retire soon. If you need to live on your “nest egg” and do not want to work again, where do you even begin? 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) Do I Even Have Enough Money to Make Investing Worthwhile?:
The short answer is YES. 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. If you have a 401(k) or 403(b) retirement plan, this matters to you 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) Learning About How to Create a Simple Model 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) You Need to Properly Assess Your Risk Tolerance:
If the stock market goes down 10% and you are so nervous that you sell, you probably should not invest in stocks at all. You have a very low risk tolerance and will not sleep well. The most important thing to learn here is that gain and losses are not proportional. 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. 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) Differences Between Active and Passive Investing:
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. There is a third, emerging category which too many say is passive investing. It is called enhanced indexing. 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) Measuring How Well Your Investment Portfolio is Performing:
I would never assert that active or passive investing is better. 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? 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) Investing in Individual Stocks and Bonds Should Be Left to Professionals:
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. You also can lose a lot of money though. The real pros spend hours upon hours learning about a particular company prior to buying the stock. How much time? Probably more than you would imagine. Refer to this article: https://latticeworkwealth.com/2013/08/09/you-purchased-a-stock-now-what/.
8) Does Hiring a Financial Professional Make Sense:
After reading all this information, it may seem like it is better to let a financial professional manage your money. 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) List of Questions to Ask Any Financial Professional:
If you still think that going to a financial professional is the best option for you, I will not fault you for that. 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) Learn How a Financial Professionals Start in Investing Field Can Bias Them:
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) Understanding Why You Have Some Advantages over Institutional Investors:
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. 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) Learn That You Can Survive as an Individual Investor as Interest Rates Rise:
Do you keep hearing that higher interest rates are going to wreak havoc on the financial markets now and for years to come? 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? Remember you are likely to live for over 20 years during your retirement years. 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 firstname.lastname@example.org. You can post them directly on my blog as well.