Many friends and relatives have patiently suffered my explanations of how things work. This has included everything from technologies such as time travel to esoteric descriptions of socio cultural behaviours and psychology.
I had the good fortune and patient ear of my friend Graeme the other day. Graeme made the mistake of asking me about personal investing. He got an hour and a half lesson. One can only hope he took away as much as I did. Every time I "teach/preach" about something, my familiarity gets clarified. There is no garauntee however about what occurs for the recipient of my "teaching/preaching". As they say in life you get what you pay for :)
I helped teach finance in my MBA program in Paris. We had the the dean of finance from Oxford's Business school teaching and he wanted some people to help out. I like sharing and thus subjected my classmates to ad hoc discussions of cash flow, IRR and other issues. I enjoy bringing things to life for people and best of all creating the "light bulb" effect with people.
A vital concept in personal investing is cost. Most investors in the U.S. buy mutual funds. These are funds managed by stock pickers etc. They are typically sold based on historical returns and some blend of risk/reward or approach. Over the long run, most will not beat a stock market index such as the S&P 500. Getting into and out of an investment can cost between 1-3% per trade depending on liquidity and commissions. Think before you transact.
If you are truly an investor, you think like a marathoner, long term. Long term little things ad up. Many funds have a management cost that you pay every year ranging from %0.25 to 1.5%. Most people give it little thought, with the exception of the person selling the fund. The average today is 1.36%
Imagine you have $1,000 to invest today and that you will make 10% annually on your money. Now imagine that every year someone comes along takes 1% out of your investment for management. How much would that cost you? The answer is $1,123. Imagine if you were spending a $1,000 on a car and the sales commission was going to be an extra $1,123. You would take a close look at that commission and what you were getting in return. The graphic and table highlighting this is here. I built a spreadsheet to play with Download worksheet.xls
If you own a mutual or bond fund please read this article on mutual funds.
