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Why Do So Few People Understand Investing?

15 December 2009 2 Comments

Very few people understand investing.  Really understand it.  As in, you can identify quality companies, understand price to earnings ratios, understand the differences when looking at different sectors and industries, understand technical indicators, market momentum, can identify real buying opportunities and actual selling opportunies.  I think there are several reasons that have contributed to this phenomenon.

Reason #1 – Trust the “Experts”

Most people have their investing activity limited to passive participation.  They have bought into the mainstream viewpoint that they have no idea what they are doing and should pay someone else to invest for them because if they try and invest on their own, they will absolutely end up losing money.  The result is mutual fund managers and financial planners with worse track records than the broad S&P performance make a killing and we’re left with mediocre results.

Interestingly, the financial planners will never advise you to sell your positions and raise cash, as if there is NEVER a good time to sell (nevermind the idea that we should buy low and sell high).  It is in their interest for you to be fully invested and generating fees; thus, it is in your interest to be fully invested.

The recommendations by the elite financial experts can be broken into two categories based on the overall market sentiment.  First, during a bull market, we’re very happy with our gains and we are encouraged to invest more because “times are good”.  The other, during a bear market, while we’re disillusioned by massive losses, we’re encouraged to invest more at lower prices and we’re assured that stocks are always a great investment over the long term.

Again, invest passively, uniformly, and consistently.  Anything else is over your head and you should leave it to the experts.

We buy into this without questioning this philosophy.  Is this really the best approach for me?  Is this the best return I can get on my money?  Is it really impossible for me to invest on my own?

Reason #2  – Lack of Time

Next, we have a society where we outsource our tasks because of our general level of busyness.  We have someone cut our lawn, we have someone do our taxes, we have someone manage our investments.  It’s not that we couldn’t do our lawn, our taxes, or our investments on our own, but we don’t have time nor the interest.  Why not just pay someone else to do it?

Paying someone else to do non valued adding work is a great idea if and only if you are using your time for something more important.  For example, I pay someone to do my lawn (considering doing it myself in the near future to save money) in an effort to spend more time with my family and on building my side income (this blog).  However, if you are simply watching more TV rather than taking on some of these tasks yourself, perhaps it’s not time or money well spent.  What is your time worth?  Could you be spending it more wisely?  Do you have time to learn how to invest?

Reason #3 – Poor Financial Health

Simply put, most people, young people included, are in terrible financial shape.  They simply don’t have money to invest; therefore, they don’t concern themselves with it.  They’re busy trying to make ends meet and make the next credit car payment.

If you don’t have money to invest, there’s really nothing to worry about.  This is a very legitimate reason, but not one to just be accepted passively.  Accept it, fix your finances, and start saving money so that you can have money to invest down the road.  Why do rich people invest better than others?  Because they’ve been working at achieving larger returns because they have money to do it!

Reason #4 – Easy Access To Passive Investing

This reason ties into reason #1, but is more focused on 401(k) plans.  Most investors have access to a 401(k) plan at work and take advantage of it.  By no means is this a bad idea; in fact, it’s a great idea and one that should be embraced.  Most people assume that since they are contributing money into a 401(k), then there is nothing else to think about.

I would encourage folks to stay active in the 401(k) but to also work at putting money in play on your own so that you can gain experience investing yourself.  Check out previous articles on how to supplement your 401(k) and answering the question whether 401(k) participation is enough for your future.

For all you 20-somethings, take this article as an encouragement to do things differently.  Learn how to invest on your own by reading quality books, following the market, and reading economic/market commentary from online blogs such as 20smoney.com and the other blogs that I often recommend.  You are in control of your financial future and investing is a big part of that.


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