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 free How to Invest and Outperform Most Active Mutual Fund Managers ($9.99 value)
- 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
How aware of your personal retirement investments are you? What commitment will you make to increase your financial understanding?
image credit; luannemckibbin
