Three Really Good Questions
I remember the day clearly. It was 2001 just after the internet bubble had burst but before 9-11. A potential new client walked in and asked to meet with me. I was available so she was brought into my office.
"I want to start buying stocks", she said. "I've read that the best way to do it is to use an online brokerage account to save fees and expenses. I have already opened an account but I still have three questions:
- How do I know what to buy?
- What price should I buy it?
- When should I sell it?"
The silence in the room must have been deafening.
I can't remember what I said, but I do remember what I thought. I wondered why she had come to see me. She wanted someone to make investment decisions for her but she also wanted to be a do-it-yourselfer at the same time … and she failed to see the conflict.
This crossed my mind recently during a morning run. I was cruising along and had let my mind wander to a new online Introduction to Investments course I am currently developing and will be teaching this fall for DMACC. The school has provided a list of competencies I need to make sure I address, but other than that there is a wide berth for me in deciding what will be taught and what the best class structure should be. What will the student expectations be? Do they expect that after one underclassman level course they will be fully armed and equipped to take on the Wizards of Wall Street? My expectations for them are not nearly as lofty. I want them to understand the basic building blocks of investing such as stocks, bonds, and alternatives. I want them to learn the basic concepts of risk and portfolio construction theories. But I have no illusions that I can, in one semester, take them from zero to hero.
In 1709, Alexander Pope (1688 – 1744) wrote
"A little learning is a dangerous thing; drink deep, or taste not the Pierian spring: there shallow draughts intoxicate the brain, and drinking largely sobers us again."
Three hundred plus years later I would add that when it comes to investments, a little learning can be an expensive thing. Thankfully, we can ignore Pope's advice to learn a lot or learn nothing at all. With a little learning we can invest in products where those three tough questions are handled professionally on your behalf; products such as mutual funds, unit investment trusts, and exchange traded funds. With a little learning, we can understand what these different constructs are, what they do well, and what their limitations are. When it comes to my students I want them to learn enough so they can understand professionally controlled investment products and, in turn, understand their own financial portfolios.
But why stop with just my students? How many clients truly understand the tools and products they own?
So over the next few articles I will cover the basics, advantages, and weaknesses of mutual funds, unit investment trusts, and exchange traded funds. I hope that you, as well as my students, find value in the learning.
The questions I was asked that day in 2001 are simple questions with difficult answers. If you are going to do-it-yourself, you need to have some difficult answers. Rely on the pros and those questions disappear.