The question came up during my mammogram (yuck), after learning I taught Investments at a local university.
The technician was an attractive single woman putting the max into her 401(K). I asked about her investments and she said they were through her employer and that they were aggressive. She was worried because the stock market was rocky and her investments weren’t going up enough.
She followed up by asking, “Are you investing in real estate?” When I replied, just my own home, she followed up with the query, “Isn’t real estate how someone gets rich?”
I replied that there were multitudes of ways to get rich.
“Have you considered investing in index funds?” was my next question.
She wasn’t sure what they were.
My final question was this, “When do you expect to retire?”
To this she replied, “About 20 years.”
The Analysis
This brief dialogue represents the gap in financial knowledge of many investors. This intelligent and well employed woman is doing great by putting money into her retirement account. But that step alone is not enough to secure her financial future. Let’s break it down a bit.
What she is doing well
She is contributing over $1,000.00 per month into her retirement account. She is invested aggressively. With 20 years until retirement, it’s not a bad idea to invest aggressively. The more risk one takes, the greater the possibility that she will earn outsized returns. (Notice I said, possibility, as there are no guarantees that her investments will perform to her expectations.)
What She Needs to Improve Upon
This investor must know in what she is invested, the characteristics of that investment, as well as the expected risks in relation to their returns.
She needs to know some investing basics such as types of investments, which ones to choose, and how to allocate her assets among the available financial assets.
My Recommendations
A quick caveat; I am not a registered investment advisor, nor do I want to be. Furthermore, no one should offer investment advice without a thorough understanding of the individual’s personal circumstances. So please do not come running to state that my advice is out of line, it’s for educational purposes only.
In spite of our minimal time together, I wanted to help her gain some basic investment information. Here’s what I suggested:
- Subscribe to Money Magazine
- Read The Elements of Investing by Malkiel and Ellis
- Download the 20 Minute Guide to Investing from the top right of this web site
- Visit Barbara Friedberg Personal Finance.com
The Takeaway
It’s an awesome start to contribute as much as the law allows to your 401(K). The more you contribute when you are young and throughout your life, the wealthier you will be at retirement. But plowing money into the account is not enough. Everyone must have someone in their family who understands investing basics in order to make the appropriate investment choices, even if they have a financial advisor.
There is no substitute for knowledge. Your future is your responsibility and you must educate yourself in order to secure your financial destiny.
Action Step:
Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.
- Read an investing book, blog, or magazine for at least 15 minutes a day and take charge of your financial future
For a quick overview of Investing Strategies, pick up my FREE eBook; 20 Minute Guide to Investing (top right of the page). If you like what you’re reading, sign up for my RSS feed or email subscription and follow me on twitter so you get the word immediately.
How aware of your personal retirement investments are you? What commitment will you make to increase your financial understanding?
image credit; luannemckibbin
Barb, really great article. Many people (myself included) blindly stick money in their 401(k) without understanding what it is they are investing in. Then they seem shocked when they don’t have enough money in retirement. Thanks for the book suggestions – I will check them out.
The $60K Project recently posted..September Budget Review
This goes with having a diversified portfolio. Many people do not understand what that means.
krantcents recently posted..Personal Best
@60k-Glad this was helplful. Bit by bit, you can get yourself educated!
@Krantcents-Agreed
For anyone who is too busy to follow the market index investing is the best approach. Only then can one blindly stick money into his account and never worry!
BeatingTheIndex recently posted..A SAD ENDING: SkyWest Energy and Marquee Petroleum To Combine
For someone just starting out, index funds are a good approach. That, and reading, lots of reading.
101 Centavos recently posted..Six Cool, High-Paying Freelance Gigs You Might Not Could Do
Great tips Barbara. I definitely need to learn more about investing myself. I may look into those books in the spring (when I have more time to read). I have started diversifying my investments and will continue to do so over the next few years.
@BEating & 101-I couldn’t have said it better myself.
@20′s-Just do a bit at a time and over time you will inrease your investing smarts.
Thanks Barb for stressing the point that we need to be educated savers and investors and aware of where we put our money. I like you tip about the notebook. I have read that before and it makes a lot sense. It keeps your ideas and plans in the forefront of your mind. If our plans are first in our mind, we will make appropriate actions.
i like fidelity because they have funds that correlate to your retirement year. The younger you are, the riskier the funds. the older you are, the safer your funds.
Charles recently posted..Tips for Living the Frugal Life – While Still Enjoying Yourself
@Miss T-I find I have to continue to write out my goals and review, or they get lost.
@Charles-Lifespan funds are good choices for those who want to set it and forget it. It’s a good idea to check them out, most discount brokers have them, and they can vary a bit.
The advice is excellent, but the technician’s lack of knowledge is frightening! She’s investing real money–and a lot of it–in investments she knows little about. If it works for her it will be pure luck–which is no way to handle investing. The “luck” could just as easily go the other way, and sooner or later it will.
This is just an opinion, but I think that people who lack understanding of investing should stay with the most conservative investments–CD’s and Treasury bills and money markets if need be. To be investing aggressively when you don’t understand what you’re doing is an accident waiting to happen. She’s worried that her holdings aren’t going up; what will she do if they start falling in a strong way? She may sell and lock in her losses!
Just a thought, but no one should be investing beyond their own level of understanding. At a minimum she needs a strong financial advisor who will invest more conservatively for her.