Investing. It can be daunting for those that have no idea what investing is all about. For me personally, money and investing were not subjects that were discussed while I was growing up. I did not hang out with people that talked about money. I attained a degree that did not require any knowledge about investing. It felt like investing was meant for grownups that had a lot of extra cash to burn.
But alas, I reluctantly entered adulthood and began to realize that maybe I should pay closer attention to my money. And that maybe I should pay a little more attention to this thing called “investing”. For the purposes of this post, I’ll use the term “investing” to refer to investing in the stock market.
So what is it with investing? Why does it feel so intimidating? Why do people shy away from it? Why do people avoid talking about it? Let’s unpack some reasons:
LACK OF KNOWLEDGE
For those of us that went to school to study veterinary medicine, the language around personal finance and investing can be an immediate turn off. Have you ever visited a foreign country where English isn’t spoken? Sure, you’ve worked hard to get your professional degree, but if you can’t even converse with a 2 year old in their native tongue, I can guarantee you that you will feel like a complete idiot in a matter of seconds. If you’re ever looking to burst your ego, go ahead and book a flight overseas to a non-English speaking country that doesn’t cater to American tourists.
So when people start throwing terms around like dividends, price to earnings ratios, mutual funds, and asset allocations, it doesn’t make much sense if you don’t know the language. So embrace the fact that you will need to learn a new language, then start diving in. If you were able to graduate from a professional school, I’m pretty sure you’ll be able to learn some basic financial concepts.
So how does one learn a new language? Let’s break it down by learning style.
If you’re visual, then read some books or go online and find some useful websites or blogs that speak to you.
If you’re more of an auditory learner, listen to some podcasts. I am a huge fan of podcasts since they allow you to multitask. Plus, it can be incredibly motivating to simply listen to someone’s tone as they talk about a topic that they care deeply about.
If you’re a verbal learner, then strike up a conversation with people and bring up the subject of investing. If you find someone passionate about the subject, they will be more than happy to explain all of the details to a newbie.
Increasing your knowledge base is key if you are genuinely interested in how to become a better investor.
THE WHY BEHIND INVESTING
What exactly is the purpose of investing? Can’t we just shove our money under a mattress and call it a day?
Well, there’s this pesky thing called inflation. It is an increase in the price of goods and services measured by the Consumer Price Index. This is why 20 years ago, $100 could buy you a lot more than it does now. The economy actually benefits from a low, steady rate of inflation, because our economy is so dependent on consumer spending. People would rather spend their money now, knowing that if they wait, what they want will cost more over time.
Imagine the opposite scenario. If you were certain that prices were going to go down in the future, then you’re more likely to hold on to your money and purchase later. Have you ever seen the fury that is Black Friday? The hype and build-up culminate in a frenzy of consumer spending because people are convinced that they are getting a good deal.
But what if you knew that prices were going to go down with no guarantee that they would go back up? There would be no Black Friday, no joyful spending. No one would be motivated to buy much of anything if they knew that prices were going to be even lower in the future and everything was perpetually “on sale”. When demand falls, then people start losing jobs because their services and skills are no longer needed. When people lose jobs, all sorts of terrible things start happening. You can see how this can go in a downward spiral pretty quickly.
So we’ve determined that inflation is a good thing, a necessary thing. But in order for our money to actually grow, we want to get returns that are higher than inflation. Nominal growth rate refers to the overall percentage growth in returns. Real growth rate takes inflation into account. So if the stock market returns are 10% and inflation is 2%, then 10% is the nominal rate while 8% is the real rate of return.
The whole point of investing is to beat inflation and grow your money. Unfortunately, what usually sticks in people’s minds is when they hear of people losing money while investing.
I don’t know about you, but the Great Recession, punctuated by the financial crisis of 2008-2009, was scary. This is coming from a person that still had a job and was pretty well insulated from the recession since we had yet to own a home or have much money invested at that point. But listening to the news on a daily basis was frightening- it seemed like the financial world was collapsing all around us and there was nothing we could do but just watch in horror as people were losing their jobs, their homes were being foreclosed on, and their retirement plans were being wiped out. Seemingly indestructible banking and financial institutions were relying on the government in order to stay solvent.
I have since learned that even the slightest little dip in the market will cause widespread panic in the news media. This is one of the reasons I’m so glad that I don’t watch the news anymore.
So here’s what I’ve learned since: investments are a risk, but just keeping your money under the mattress is a risk as well. It’s your job to figure out how you want to manage your risk.
Keeping your money in the bank with really low interest rates (or under the mattress)—> you lose money in the long term due to inflation and decreased purchasing power.
Investing your money—> you could either lose it all or become a multi-billionaire like Warren Buffett.
No wonder investing can be scary. You want to be somewhere between these two extremes.
I am not here to give you advice on what to do with your investments. That will be ultimately your choice. But I believe that if we understand the basics, we can invest in a smart, responsible way. Everyone will have their own methods of investing, and that’s what makes personal finance so personal.
So start by just educating yourself using the resources above. As with anything, it will take some time and repeated exposure to feel comfortable with a topic. Rather than remaining on the sidelines due to lack of knowledge and fear, you will feel empowered to make your own choices about what to do with your money.
I will be continuing this discussion, so stay tuned for Part 2!
Do you have any additional resources you’d recommend? Comment below!