You're More of a Money Expert Than You Think

By Markets Fool.com


Photo: Alan Cleaver, Flickr

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Most Americans are woefully behind the curve when it comes to saving and investing for retirement. To some degree, it's because they don't think highly of their own investing skills. Most of us are wrong to think that way, though. No matter who you are, how rich you are, or what you do for a living, you're very likely much more of a money expert than you believe.

For context, check out these sobering statistics: According to the 2014 Retirement Confidence Survey, 60% of American workers polled had less than $25,000 saved for retirement (excluding the value of their homes) and 36% had savedless than $1,000. Yikes. Meanwhile, according to a survey from Natixis Global Asset Management, only about 18% of investors around the world think their investment knowledge is very strong. Yikes again.

These results are not that surprising, though, for several reasons. For one, few of us were taught anything about managing money, not to mention investing, when we were in school. (Heck, I made it all the way through an MBA program without learning many practical things about investing my own money for retirement.) Beyond that, many Americans are reluctant to discuss their finances with loved ones or friends. Very likely, many of us believe we know much less than others about finance and investing, so we don't want to embarrass ourselves. In reality, most of us are in the same boat.

You probably know far more than you think you do, though. Or perhaps you just haven't realized how many things you know can be applied successfully to investing.

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A lottery ticket is a high-risk, high-reward proposition. Photo: AdventuresinAnalog, Flickr.

Risk and reward
For starters, you probably understand the relationship between risk and reward. You realize a lottery ticket offers the chance of great reward, but is also very risky -- i.e., you're extremely unlikely to get that great reward. Conversely, money sitting in a savings account is at very little risk but will usually pay fairly little, too (except in high interest rate environments).

It's generally the same in investing. You can collect income from government bonds (such as T-bills), companies on shaky ground (junk bonds), or various entities in between. The government bonds have less risk and therefore offer less reward. The junk bonds, in order to entice you, offer higher interest rates. Meanwhile, stocks tend to outperform bonds over the long haul, but they can be more volatile.

Supply and demand
This is another concept central to investing. You know that car prices will often not be discounted if inventory is limited, yet they can fall when it's not. With stocks, if a company is hot and many people want to own it, they will bid the price up. However, if a company is suddenly found to be toxic and many shareholders want to sell their stock, the price will tank. A stock's price is essentially the price at which people are willing to buy and sell it at any given moment.

Too good to be true
This is valuable to know in the investing arena, and you probably know it, too: Things that sound too good to be true often are. It's true of "amazing" opportunities presented to you in emails that feature all capital letters and many exclamation marks. It's also true when a broker or salesperson contacts you (or you receive an unsolicited investment "newsletter") with a can't-miss promise of riches if you buy now. It's also true when you're being pitched some investment product that seems to have it all -- growth, limited downside, etc. You might not realize that it won't grow as much as better products, or that it will charge you steep fees. Low risk and high reward don't usually go together.

Fees matter
Speaking of fees, you probably have noticed them when you bank, and you might aim to keep fees from out-of-network ATMs to a minimum. Or maybe you negotiated a lower fee when you signed up with a realtor to sell your home, or shopped around for the best rates and lowest fees when you got a mortgage. The financial world is rife with fees, so aim to keep them low. Know that there are so many great no-load mutual funds that you needn't buy a loaded one. Know that index funds often charge an annual fee ("expense ratio") of 0.25% or less, and can perform better than managed mutual funds that charge 1% or more. Know that brokerages charge a range of fees and you can do much better than paying $30 or $50 or more per trade. Plenty of good brokerages charge $10 or less. Little differences in fees can make a huge difference to your portfolio in the long run.

Be the tortoise, not the hare. Aim for long-term success.

Patience
Finally, you probably understand the necessity of patience. You know you will have to save diligently for a while to accumulate a down payment on a home, for example. In investing, you'll also have to be patient. A portfolio that starts with a value of $25,000 will turn into almost $65,000 over a decade, if it rises at the stock market's long-term average annual growth rate of 10%. Over 20 years, though, it can top $168,000, and over 30 years, $436,000. (And that's without any additional investments made to it.) If you buy into a great company, you might make some good money within a year or three, but if you hang on for many years (as long it's still healthy and growing), you can make far more. Patience pays.

You already have a lot of what it takes to invest well. Take a little time to learn more, and there's no telling how well you can do.

The article You're More of a Money Expert Than You Think originally appeared on Fool.com.

Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter,has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.