All that’s necessary is to understand a couple of very basic things: why people invest, and what sort of general goals they have for their investments.
Where should we start, when we think about investing? Here’s a simple commonsense definition. Investing is setting aside money today to give to someone (or to some entity) that you hope will bring you more money in the future. When you expect to receive it, whether your expectation is based on a hope or a promise – there are all kinds of variations. But basically, it’s a sacrifice today to get more tomorrow. That’s it.
You don’t need to know the legal definitions of assets, you don’t need to be intimately familiar with investment history, you don’t need to know the mathematics of statistical distributions, you don’t need to understand long tails or fat tails, you don’t need to know where and how to do trading. You don’t need any of that in order to understand investment principles.
If you have an investment, sometimes you can sell it to someone else, if you can agree on a price. And if there are lots of willing buyers and sellers, and lots of information about the prospects of a particular enterprise, it won’t be difficult to reach agreement on a price that buyers and sellers agree is fair. Of course, since the future is unknowable, some will do better than others at the agreed price – but in the absence of a crystal ball, the prospects favor neither buyer nor seller at the expense of the other.
You probably already realize that people hate to take risks, particularly large risks. (Surprised? Of course not!) But some will be willing, at least to some extent. In fact, it makes sense to divide investments into two basic types: safety-oriented (where relative certainty of the outcome is more important than growth prospects) and growth-oriented (much more profit hoped for – but less certain).
How you decide to split your investments between safety-oriented and growth-oriented is a fundamental question. And there’s no one-size-fits-all right answer. It’ll depend partly on your financial position and partly on psychological considerations. In the book (and in later postings) I’ll go into these in some detail. You’ll be glad to know that you’re already equipped to think about these considerations, once you see what the relevant questions are.
Investing means setting aside money today in the hope that it will produce more in the future. There are basically two kinds of investment: safety-oriented (where relative certainty of the outcome is more important than growth prospects) and growth-oriented (much more profit hoped for – but less certain).
I have written about retirement planning before and some of that material also relates to topics or issues that are being discussed here. Where relevant I draw on material from three sources: The Retirement Plan Solution (co-authored with Bob Collie and Matt Smith, published by John Wiley & Sons, Inc., 2009), my foreword to Someday Rich (by Timothy Noonan and Matt Smith, also published by Wiley, 2012), and my occasional column The Art of Investment in the FT Money supplement of The Financial Times, published in the UK. I am grateful to the other authors and to The Financial Times for permission to use the material here.