Yahoo Finance 5 Things My Dad Taught Me About Investing
My dad was not a banker or financial analyst. He was one of those old-fashioned "country" lawyers who could see past the con job that someone was trying to pull, cut to the heart of the matter and see a problem through to its logical conclusion. He didn't make big money, but he eventually became a "millionaire next door" by living frugally, paying his bills on time and putting something aside for the future.
You might think his investing approach from 50 years ago wouldn't be relevant today. It isn't, if you want to be a day trader or bet on the next new social media stock. But the fundamentals haven't changed from his time to ours -- not if you're trying to build a decent nest egg and secure a comfortable retirement.
He would advise you to make sure your insurance policies are in place, and keep some money in a federally insured bank account. But then he'd tell you, whatever your long-term goals, that you should invest at least some of your savings in the stock market. Despite its treacherous pitfalls, the market is one of the few time-tested routes to financial security.
But as you go about picking stocks or researching mutual funds or exchange-traded funds, or discussing a plan with your financial adviser, remember to practice these five basic principles. Or, what my dad might have called "words to the wise."
1. Don't get scared ... away from investing because you think the stock market is rigged. Contrary to what many people believe, over the years the equity markets have been democratized -- by Merrill Lynch back in his day, and in modern times by discount brokers like Fidelity, Schwab and Vanguard. There has been a huge increase of financial information available in the media, so the stock market is relatively open and transparent, particularly when compared to debt markets that do not enjoy the same level of public scrutiny.
2. Wall Street insiders ... purposely complicate financial products, labeling them with misleading names to confuse the public. For example, there's the credit default swap, which wasn't really a swap at all. It was an insurance policy. Insiders end up making a lot of money when customers don't understand what they are buying. So follow my dad's advice, which wasn't original to him, but is no less worthwhile: Invest in companies where you know what they do and how they make money. If an investment story is too complicated, it's probably not reliable.
3. If you think you can beat the market ... well, good luck with that! You're not the smartest person on Wall Street, and neither is your financial adviser. Top players in the investment world work for big institutions and deal in hundreds of millions of dollars. The people who work for you are the ones who couldn't get a job where the real money is made. You can't outsmart the market, so just be in the market, with a low-cost index mutual fund or exchange-traded fund.
4. People on Wall Street are not ... looking out for your best interests. They're looking out for their own best interests. (If it's any consolation, the politicians in Washington, the moviemakers in Hollywood and the oil producers in Texas are just as self-interested -- and often shortsighted -- as any shark on Wall Street.) This is another reason to stick with a low-cost mutual fund instead of taking a flyer on a hot stock that someone smarter than you may be trying to unload.
5. Investment experts rely on ... sophisticated statistical models, and they have access to top leaders in the business world. But even they don't always know what's going on. We're not old enough to remember 1929, but maybe you recall the crash of 1987 or the flash crash in May 2010. Wall Street wizards enjoy all kinds of advantages we don't have -- but even they don't get it right all the time, because things in the real world don't always work out the way the analysts say it will.
Keep in mind that the stock market doesn't go up all the time. And it is always ready to take money from bold and brash traders who think they know more than they do. But the stock market typically goes up between 5 and 10 percent per year. So most of the time, the market gives most of us a chance to build a retirement portfolio and produce income in our later years when we're no longer working.
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