How Much Investment Education Do I Really Need?

January 06, 2011

I often get asked the best way to learn about investing.  It really is quite simple.  Just like anything else, if you have even a slight interest in something, you will be more open to learning about that topic.  For investing, some people will want to learn everything they can because they aspire to manage their own portfolios at some point.  Others will want to know just enough so that they will not be taken advantage of.  But, everyone should have at least an understanding of not only what they’re invested in but also why.

I’ll give you an example from my personal portfolio.  If someone were to ask me why I hold ABC stock and what it is, I could explain what the company does, my belief that in the long term it is a good investment, the possible negative aspects, the tax implications for when I sell, and why I have it in the type of account I do.  Now, could I expand on that explanation?  Sure.  But, do I understand the basics?  Absolutely.

Of course the better versed you are in the different types of investments and their respective dynamics, the more comfortable you should be.  That being said I will leave you with an exercise that I used to have all my clients do prior to writing me a check.  For every investment purchase, explain to a friend or loved one the reason that you’re purchasing the investment, the potential upside and potential downside and what your sell strategy is.  If you can clearly do that you understand the basics of your investment.  If you can’t, time for more homework.