Welcome Honors Students!
Over at Wallet Hacks Jim Wang has identified 70 life skills to help you handle money that you shouldn’t be without.
This is the second course in our 200 level Money Skills Curriculum.
Today, we will be looking into his suggestions for “Investing skills”; a collection of habits designed to put your long-term financial goals in focus and ensure that you don’t lose large sums in a market slump. These are a good baseline for building good financial priorities that will be invaluable in learning the next set of steps.
- Know the basics of investing – At first glance, investing can seem like a complicated topic. That is why it’s essential to cut through the noise and focus on investment basics before trying to do too much with your money.
- Know different account types and order of saving – When you’re starting out, it’s difficult to figure out how to prioritize your investments and why the order you save in which accounts has a big impact on performance.
- Power of compounding – Whether it’s saving or investing, the importance of compound interest can never be stressed enough.
- Open a brokerage account – It’s not hard once you do it but it can be intimidating, but you need to know how to open a brokerage account.
- How inflation works – Inflation is an invisible erosion of your money’s value (purchasing power) and it’s important to understand how it works and the impact is has on your investments.
- Understand different asset classes, diversification – Index funds, Mutual funds, stocks, bonds.
- What diversification really means (and modern portfolio theory) – This can get into the weeds a little bit but these ideas, like modern portfolio theory, and useful ideas to understand.
- Understand risk management – Financial risk management is how you make more by risking less. The goal is to ensure losses never exceed acceptable boundaries by following disciplined practices including position sizing, diversification, valuation, loss prevention, due diligence, and exit strategies. Think of it like a football team that never gives up a first down. You don’t have to score many points to win the game. The same is true is growing your wealth, and financial risk management is the essential practice to making that happen.
- Read a company’s financials – annual report, financial statements, balance sheets, etc.
- Rebalance a portfolio – You wanted 80% stocks, 20% bonds; fast forward a year and it’s now a little out of whack. What do you do to get it back into sync?
- Buy a Treasury bond – Whether online at Treasury Direct or at the bank.
- The Rule 72 – A useful rule of thumb, divide 72 by your expected rate of return and that’s roughly how many years it’ll take your investment to double in value.
This is a part of a continuing series of practical financial skills for life. Read the original article here.