Finance 101: Part 3 – Getting started with saving/investing

Continuing forward on our exploration of personal finance.

Suppose we’ve decided to save for something – see the previous post for some ideas of how much one should be saving for various life events.  How should one put that money to work?

The investing world is full of instruments/strategies/accounts/advice for how to save money.  It’s a mess, frankly.  I think this is because the financial world is as about as important to our individual lives as medicine, but not regulated anywhere near as tightly:

  • My impression is most people understand little about finance; the same goes for general health.  We’re led by rules of thumb like ‘cover your head when your feet are cold’, ‘drink 2 litres of water per day’, or ‘put your age, as a percent, of your investment portfolio in bonds versus stocks’.  These are generally gross oversimplifications, nudging us to good behaviour.
  • When we really don’t know what’s going on with our health (if we have a big problem), we go to a professional.  We know our health provider is a professional, because he/she’s been certified as such by one of various government-regulated organisations.  He/she has likely passed strenuous exams, had long internships with other doctors, etc.
  • Naturally, we’d like to do the same when we’re in the same financial health.  Unfortunately, there is 1 big reason why finding a financial professional is much more difficult than a health professional: no consistent certification. 
    • Anyone can dispense financial advice.  I guess that’s partly what I’m doing here.
    • When I took the US Series 7 and 63 exams – allowing me to manage others’ portfolios and/or sell securities to individuals – I was stunned how basic the knowledge requirement was for passing the exams.
    • The Chartered Financial Analyst (CFA) exams were a better challenge.  At least people who pass these exams needed to have a decent understanding of investment process, the universe of investments, and basic valuation at exam time.
    • Bottom line: ‘believe nothing that you hear, and half of what you see’ comes to mind.  Searching out a helpful financial advisor is really tough when there’s no real regulatory separation between hacks and strong performers.

What to do, then?

  1. Basic education.  Like reading this blog, or writings from some of the links at right.  There will be a lot of differences of opinion, but the basic facts should be the same.  What are your options and opportunities out there; what are reasonable expectations (e.g. don’t expect 20% return on stocks each year, and don’t expect 0% interest rates on savings forever, either).
  2. Get talking.  As someone who loves talking about money, I always have to remember (or get reminded) that ‘money isn’t something we talk about’.  I say: enough of that.  Ask friends and family what they’re doing about saving (e.g. ‘have you found a good rate on bank savings?’, ‘do you use a financial advisor?’).  Exception: don’t ask around for stock tips or the like, as a) it likely will make others uncomfortable, and b) I believe few really tell the truth of all their winners AND losers.  It’s like a Facebook profile: only the good stuff comes out.
  3. Make an informed decision whether to use a financial advisor.  There are loads of decent resources online, as well as tons of free tools from discount brokers these days.  If you have the time and temperament to manage your savings, I recommend it.  It’s like having the time and desire to build your own car – you will have a better idea what can go wrong, and how to fix problems as they arise.  If you don’t have the time and temperament, shop around (including using personal referrals) for a financial advisor.  In my opinion, don’t expect an advisor to outpace the markets consistently; just expect them to have a strategy, and stick with it.
  4. If you’re managing your own money, get reading!  I believe more reading is better, as long as it’s more educational than news-driven.  For example, I’m a big fan of finance textbooks (see some of my previous posts), but not such a fan of the latest and greatest ideas coming from CNBC or Marketwatch.

More concrete definitions/explanations of savings vehicles next time…  stay tuned.

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