“What Should I Invest In?”

By in Asset Allocation, Investing | 11 comments

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

    11 Comments

  1. 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

    October 12, 2011

  2. This goes with having a diversified portfolio. Many people do not understand what that means.

    krantcents

    October 12, 2011

  3. @60k-Glad this was helplful. Bit by bit, you can get yourself educated!
    @Krantcents-Agreed

    Barb

    October 12, 2011

  4. 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

    October 12, 2011

  5. For someone just starting out, index funds are a good approach. That, and reading, lots of reading.

    101 Centavos

    October 12, 2011

  6. 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.

    20's Finances

    October 13, 2011

  7. @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.

    Barb

    October 13, 2011

  8. 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.

    Miss T @ Prairie Ecothrifter

    October 13, 2011

  9. 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

    October 13, 2011

  10. @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.

    Barb

    October 13, 2011

  11. 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.

    Kevin@RothIRA

    October 25, 2011

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