Education is an absolute necessity for traders and investors. However, deciding where to begin and what to include in the course of study is not so obvious.
Assume you encounter someone who had never paid attention to the markets, but who comes to you seeking guidance. This may be a young person in his or her first job and has some spare cash for the first time. Or it may be someone who just realized that at age 50 it was past time to get started saving for retirement. Do you know what you would tell that person to do, or suggest how to get started?
The reason behind today’s post is that I recently read a post written by one of my favorite bloggers. The advice given probably seems reasonable to many. But I felt the advice was very far removed from my reality, and that the entire topic deserves closer scrutiny.
1) The advice that bothered me came from a recent post and suggested a new trader be given a crash course in technical analysis, with the goal being to learn to read charts and recognize specific patterns. I know that technicians can be very successful traders and that some have a special talent for reading charts and discerning something likely to occur. However, this is a difficult field of study, and there is no reason to believe that someone who is completely new to trading would have he slightest understanding of how to comprehend the data that goes into the chart and would have zero chance to understand the final charts.
Despite the success stories, some people use charts – yet continue to lose money. It’s not the fault of the charts. Rather it’s the expectation that using charts makes trading simple.
2) I found the following bit of advice in a 2006 blog post:
All investors share the same goal. They want to get more money out of their investment than they put into it…investors have to decide how much risk they are willing to take and for how long.
One choice for people who want a low-risk investment is the money market…
This writer took the stance that the complete novice wants to know how to put money into a low-yield money market fund (Yields were higher five years ago than they are today). Would anyone really offer a brief description of a money market fund, stock, or bond – and then expect the new investor to make an investment decision based on that information? To me that is insulting to the person asking the question and also shows a lot of ignorance on the part of the person making the recommendation.
3) I truly understand that there are numerous paths for the new investor, but the only one that makes sense to me is to invest any cash destined for the stock market into low fee index funds. It may be even better to avoid the stock market completely.
I’d love to say that a professional financial planner is the correct path, but found that too many depend on modern portfolio theory and the idea of diversification to take care of risk. That may have been a reasonable approach last century, but it is a rather naive stance today.
4) I believe that the best advice would be to bank the money and spend some time reading. I do understand that some beginner books are no better than trash, but there are volumes from which a patient reader can garner some useful advice. The truth is that this is a difficult undertaking. I’m thrilled that no one has ever asked that question of me.
I believe it is easier to tell investors what NOT to do, rather than what to do. Of course that does nothing to solve the problems of the person asking the question. For example:
a) Don’t buy front-end load mutual funds. [Don’t buy mutual funds is even better advice]
Never invest in something you don’t understand. You need to be able to explain how an asset generates a profit, preferably in one or two short sentences. If you can’t, you are gambling, not investing.
This quote, or something very similar has been uttered by many well known investor types. And it makes perfect sense. Still it does not tell the investor what to do with the cash on hand.
Does anyone have a great suggestion for the person who knows nothing of stocks, bonds, or other investment choices, yet is in position to make the very first investment of his/her life? Where would you send that person and what should he/she try to learn.