Investing can be as difficult as you want to make it. I don't like it that difficult, so my goal over the next few posts will be to break down what I consider the essential lessons that I try to get my Grade 9 and 10 business classes to walk away from the course with.
When I am done, if you still want to let your bank do the driving for you, that is cool. My hope is that you will be a little bit better informed than before. If I do my job at least. So here we go...
I don't have the get rich quick scheme. No one does.
Correction, my 3rd year Finance Prof. said that every once and awhile there really is a stock picker who can just read the market and makes a mint. You and I don't hear about him or her because they work for an institution for a few years, then retire to a mountain villa by age 30. They don't star in Wall Street 3 or write a book telling you how to do it.
So, I'm not going to write about getting rich. I am going to write about managing your money and general financial literacy.
Why do I imagine that I can tell you about these topics?
- My undergrad degree is in Finance with a minor in Economics. I passed the Level 1 of the Chartered Financial Analyst (the CFA is
athe professional money management designation) Exam before the teaching bug bit me. Actually, it was because I was trying to teach people how to invest and not just telling them to invest with me that made me realise I was doing the wrong thing.
- I have been licensed to sell Mutual Funds, Insurance and passed the Canadian Securities Course and IFIC Operations course. All pretty unrelated to each other (if you know the industry) but I just want you to know that I'm not making this stuff up.
- I now teach one of the only personal finance courses a high school student can take before he or she gets out into the real world, so I feel compelled to know my stuff. Oh, and the course is optional. Just like when we were in high school, you can't graduate without reading Shakespeare (important, don't get me wrong, I'm not a Bard-hater), but you can graduate without knowing what a mutual fund is or how to write a budget.
I'm glad that is done; I like writing about my qualifications about as much as you probably liked reading them, but I still thought it was important to toss them out there. Before you get financial advice from anyone, you need to learn and understand their qualifications.
One final note:
I am not working for anybody who sells investments right now. This may be the single-best thing I have going for me as an investment advisor.
When you go to a bank and ask for investment advice, it is like going to a Ford Dealership and asking which is the best car to drive. It is a commission-driven industry and everyone has their own thing they can sell you. Yes, there are ethical standards and tests and certifications, but at the end of the day, no one will send you across the street to the competition.
So class lets get started. One simple concept to begin with: Time.
I will come back to 'Time' as a key concern in future instalments, but today all I want to use it for is make you consider Investing and Personal Finance a little more seriously.
1) The first illusion that 'Time' should crush is that money in a no-return bank account (like most of the savings/ chequing accounts out there) is 'safe'.
Money in bank accounts (but not investments at your bank) is insured up to $100 000. I'm not talking about a Mary Poppins/Its A Wonderful Life Bank Run. Those are so unheard of now, that most people don't even understand what is going on in those respective scenes any more.
What I am talking about is Inflation. Year in, year out, money buys less than it used to. Ask your parents what gum used to cost. Hell, ask yourself. Even at the current modest numbers, it eats away at your 'nest egg' to the tune of 1-3% a year. That means just to keep your money from being worth less than it was last year, you need to be investing in something. We'll get to that.
2) Time can also be a friend.
Compound interest is the single most important tool an investor has working for them, but the earlier you start, the better.
I use this example in my class every year and kids are always blown away. Most grown ups are too.
Basically someone can invest a lot less money, but start earlier and end up with more money than someone who started later and invested more. Compound Interest is called magic all the time because of examples like this. I hate that - it isn't magic, it is math (exponents to be exact). Here is how I explain compounding:
Take a piece of paper and fold it in half. In this simplified example, a fold represents a year of investing and the 'layers' of paper are the return your money earns. The first fold yields 2 layers. The next fold - 4 layers, 3rd fold - 8 layers and so on. Layers of paper grow like rabbits. If you could fold the paper 20 times, you would get over 1 million layers of paper. Unfortunately with paper you'll never get there. You start having trouble folding it around 6-7th time (the world record is 12 folds).
With investing, the only limit on how many times you can 'fold' your money is Time. Start earlier, get to fold more. Start later - you need to bring more paper to fold or you'll be playing catch up forever.
OK. So maybe that is a lot to digest. I'm just hoping it got you thinking a bit - thinking about where your money is now and thinking if you have any compounding to grow for the future. Part 2 in this series will be taking a step or two back and talking about
What I find really interesting is that finance is a bit like sex ed - parents don't like talking about it and most people blunder into it with bad advice from friends or infomercials.
So, I'm wondering, who taught your financial ed?
The "Be Your Own Investment Manager" Series:
Part 2: How Much and How Often to Invest
Part 3: Invest in Your Debt?
Part 4: Risk and Return
Part 5: Mutual Funds
Part 6: Simple Investment Options
Part 7: Saving for Retirement (RRSPs)
Part 8: The Colour and Psychology of Money
Part 9: Saving for Education