Investing

Dr. Allen Cox, Ph.D. in Economics & Managing Director of the Maryland Coalition for Financial Literacy, discusses why investing is not easy and offers tips to understanding basic investment strategies.

Investing vs. Saving

Investing differs from saving because the goal of investing is to have money “work for you”. One might have a place at home to save money, but that is not investing. Money saved in a non-interest bearing account is not making you more money, nor does that kind of saving build wealth because the value of the uninvested money is eroded by inflation.  There are various ways to invest -- such as stocks, bonds, mutual funds, exchange traded funds, annuities, real estate, commodities and other financial products.

Federal & State Industry Regulation

Investments are regulated by federal and state agencies in order to protect investor rights. If you have questions or need to file a complaint, go to:

• Federal regulation: www.sec.gov/answers
• State regulation:  www.oag.state.md.us/Securities

Investment Tips

There are a few basic ideas that most investment advisors generally agree on, the most important being - never invest in anything that you do not understand.

• Don’t put all of your money in one type of investment. Be Diversified - meaning that you should put your money in a variety of investments.

The reason for not investing in one type of financial product is because in the case of stocks, for example, there have been times when they have out performed other types of investments --but there have been times when they have not. So you should spread your investments into additional wealth-building products, such as bonds and/or commodities.

• Pay attention to how much you are paying in investment fees or commissions.

To get into most investments a fee or commission is charged. For a mutual fund it might be up to 2% a year.  A commission for a full-service broker to buy or sell stock for you might be an even higher percentage depending on several factors. The point is, the fees and commissions add up fast and it pays to shop around for the best places to put your money, which includes a cost calculation of the fees associated with the investment.

• Choosing a financial advisor is similar to choosing a doctor.

If you want to hire someone to give you financial advice, hire someone with whom you feel you can trust to give you the best advice, just as you would your doctor. The person should be a certified financial advisor who has a track record of helping clients achieve their investment goals. If the advisor is promising you something that sounds too good to be true – it probably is. If the advisor is asking you to trust him/her to put your money in something that is too complicated for you to understand – back off.

• Before you invest, know the risks.

There is no such thing as an investment with high returns and low risk no mater what you may hear. Investors need to ask themselves, “What is my risk tolerance?” “If this investment goes down 20% after I get into it, am I going to be able to sleep at night?” Ultra safe investments usually have relatively low rates of return, like government backed US Savings Bonds. Ultra risky investments may pay off big, but also carry huge risks of losing everything.

• Pay attention to events that affect your investment portfolio.

No investment can be ignored. We used to think that the value of our houses will always go up, but recent events have proved otherwise. Blue Chip stocks used to be a pretty safe investment, but not in 2008 and early 2009. The list goes on and on of investments that used to be relatively safe, but now must be closely monitored. Investors have to pay attention to what is happening in the world, the country, their state and neighborhoods. Staying informed will help investors avoid most severe losses and at the same time help them recognize potential investment opportunities. Investors who are unable or unwilling to do their homework should use an investment advisor whose job it is to pay attention for the investor. The old adage of “buy and hold”, meaning buy into something that has a history of steady returns and assume no losses will occur, no longer seems to be the wisest investment style.

• Start investing as young as possible.

It takes time to build wealth. Instead of trying to get rich “overnight”, we need to understand that most wealthy people have gotten that way after many years of investing. This is because that over the course of time, dividends are accumulated on top of past dividends; interest is paid on top of interest. Additional shares of stock can be purchased automatically with each round of dividends paid out to shareholders. Interest and dividend accumulations amount to significantly more money than the initial investment. Someone 22 years old who invests just $40 per week for 45 years can accumulate more than $1 million dollars by age 67 if they can average 8.5% per year in returns. If the same person waits ten years (age 32) to start investing the same amount ($40 per week) the accumulated wealth drops more than half to about $455,000.

• Invest in your own Human Capital.

While college is not for everyone, investing in your own skills and knowledge is. For some, a college degree is essential for the career path they have chosen. For others, learning how to be better at what they do will help them move up the promotion ladder. The point is, no matter what age, people need to invest in their own human capital. For those with entrepreneurial skills, a working knowledge of accounting, marketing and finance are essential to running a successful business. People who feel stuck in their jobs should think about developing knowledge and skills in something that might offer a chance for a better job. The workplace is constantly changing and workers need to invest in their own knowledge and skills to keep up with the changes they see happening.

• Be charitable.

Building wealth is a very worthwhile lifetime goal, but so is giving back some of that accumulated wealth. Charities depend on the benevolence of those who can afford or are willing to contribute to them. Since luck plays a large part in what happens to us, be it the accident of birth or just happening to be in the right investment at the right time, we all need to find someway to help others who may have not been as lucky as we are. Billionaire Warren Buffet recently announced that he was going to take care of his children financially, but that he was going to give away most of his accumulated wealth upon his death. Most wealthy people do the same. However, even those with limited means can make a significant difference in the life of someone else by being charitable rather than selfish with their money, time and resources.

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