Sunday, July 24, 2011

Viewer Mail - Where to Learn About Finances?

A reader asks:
do you also have suggestions for where one can learn to think about money and analyze financial reports, investments etc. without having to attend university?

Most financial literacy pages assume knowledge of some (perhaps fundamental) concepts and the reader is then left hanging.

Good question.  Company statements and financial statements are impenetrable, even to the expert in the field.   Trying to make sense of a company's quarterly earnings statement or annual report is often an exercise in futility.

But the basics about any company or investment are not hard to fathom - and if someone makes it hard to fathom, well you know why - they are trying to rip you off.  Is a company profitable?  If so, how much?  What is the profit per share in terms of price per share (the inverse of the P/E ratio)?  If you invest $10 in a company, what does it earn in profits, for a year for that $10 - and are you better off buying a CD or something?  Does the company pay dividends back to you, or retain the earnings, like these high tech companies?  Do you feel you are buying something you don't understand?  If so, don't!

I think for the average "small investor" (e.g., working chump like you and me) the key is to use common sense.

1.  Don't fall for the something-for-nothing rigamarole.  It never works.

2.  Don't look for answers with gurus, financial seminars, books, or whatever.  Sooze Orman doesn't have any secrets that you don't already know.

3.  Diversify your investments.  Putting everything in a single mutual fund, IRA, stock, etc., is a bad idea.

4.  Save Consistently over time - put away money.  Most of what you will get out of investing is what you put in.

5.  Stock picking is for chumps.  The idea that you can pick a stock and then watch it take off like a rocket is, well, Hollywood.  And it reduces the market to the Casino.  If you want to gamble, go to a Casino.   But you and I don't have the insider information to "win" at stock picking.  Sometimes we hit it big - but that just encourages the casino mentality.

6.  Ask pointed questions about loads in funds - often your financial adviser won't answer them.  I bought some American Funds and my financial adviser never told me that (a) there was a 5% fee on every investment and (b) he got most of that.

7.  Spend less - it is tempting to lease cars, buy a jet ski, a boat, or a fancy house.  But spending isn't wealth.  Accumulating money is.

8.  Pay down and pay OFF debt.  Paying off debt is the 100% safe investment, and the savings in less interest paid are guaranteed.  Plus, you will have to be debt-free sometime in your life - when you retire.

Those eight basic principles are it, really.  To become rich, you have to accumulate money.  The idea that you can become rich by investing a little in the "right" place is, well, a fantasy sold to us by the financial industry.

All that being said, your local library has a lot of tomes about finances.  But beware - many of them are from Financial Gurus who are touting bad advice or trying to sell you on their program.

They really don't know more than you already do - your gut instincts.

Good Luck!