Key Takeaways
- Investing, like growing up, can be very complex.
- Factors such as what markets you invest in, your personal goals and risk tolerance, how you diversify and allocate your assets, and who you use to help you invest your money, all make up this complicated system.
- It’s up to you to determine how you are comfortable investing, but don’t be afraid to reach out for guidance to ensure you make good decisions about your money.
There’s the “terrible twos”, the nasty middle schoolers, and the indifferent teenagers. There’s reading, writing, and arithmetic, and emotional and social factors. It’s complex growing up!
Investing is kind of the same way. It’s very complex, and it started with Adam Smith back in the late 1700s with the publication of “The Wealth of Nations.” In it, he describes the free markets and he looks at what capitalism is. Here in the U.S., we’ve really embraced this.
Now, we have the government and what they do, and private companies doing what they do, but we’re primarily looking at what the markets do. You have cash, bonds, and stocks. The latter two are called risk markets. Why? Because we’re taking more risk when we invest in those markets.
To better visualize this risk, take a look at the pyramid below. We start with cash and cash equivalents, where we earn a very low return. Move up to bonds, and the return goes up, but so does the risk. At the top of the pyramid, we have stocks, and the returns are even greater, as is the risk. As we come back down the pyramid, it reverses.
We also must take in to account our own selves; our goals, our plans, our tolerance for risk. How will we deal with all of this?
Then there’s the reading, writing, and arithmetic of investing. You have diversification, which is not putting all your money in one place. There’s asset allocation: spreading your investing between cash, stocks, bonds, and other areas. And finally, you have compound interest, and this is where we can really grow our wealth very quickly.
Finally, we’ve got investment managers. Sometimes they do trading. Some of them are fundamentalists, where they look at concrete information about a company’s business to determine its value. Others are technicians, and they take a technical approach in looking at the way pure market factors affect a stock.
It’s up to you to put together this symphony of harmonious, yet varying factors to make it through good investing, and it’s tough making money! You can do it yourself, or you can hire a professional, but it’s all about making good, smart decisions about how you go about investing.
Until next time, enjoy.
Gary