Author’s note: Please excuse last week’s absence of post. I was not able to better organize my schedule between researching about this article, managing side projects and settling in to our new home. Thank you for understanding. I do hope that the practicality of this post outweighs the lack of publishing several days ago.
This post complements the previous one (Adulting and Money Management 2: “Hooray, I have money! now what?”) that encourages channeling one’s savings into investment.
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Introduction: “Adulting” and Research
The term “adulting” was coined to describe a group of people transitioning from youths to adults, associating the latter with a sense of responsibility, commitment, maturity and trustworthiness.
The Urban Dictionary online defines adulting (v) as:
“To do grown up things and hold responsibilities such as, a 9-5 job, a mortgage/rent, a car payment, or anything else that makes one think of grown ups.”
Research (n) has several analogous definitions, but the one I like most is from Dictionary.com:
“diligent and systematic inquiry or investigation into a subject in order to discover or revise facts, theories, applications, etc.”
I identified adulting with research because being responsible usually entails being aware the effect of certain factors, or what elements would be affected once a decision is made. It requires to be informed of the risks, costs and benefits of each resolution or judgement. As you might have guessed, the best way to achieve this is to gather as much information as possible; and if that can be done in a systematic and efficient manner, all the better.
I never really gave much thought about researching until I bumped my thick head to wall after wall of reality. After the 256th bump, I had to admit that INFORMATION IS VITAL (some say it’s power, others say it’s equivalent to money…); but to be more precise, ACCESSING THE RIGHT INFORMATION MARKS THE DIFFERENCE. Unfortunately, there is no short cut to knowing what the right information exactly is. Even if helpful peers point it out, what’s “right” for them might not be right for you. So really, the only way to do this correctly is to start making inquiries yourself.
Nobody ever told me about this- not even my teachers in college. You’d think that people in charge of molding future economically-oriented minds would consider relaying this message…
(Later on when I reviewed some of my notes, I realized how this message was indeed passed on in the form of riddles.)
Research related to investing
Anybody who wishes to get the most out of what he has to offer will not hesitate to gather the necessary data to choose the best option. They will not stop at believing hearsay, although they will certainly consider that type of information.
Still, there are others who are too trusting, too optimistic, or simply too lazy. Just like me, they won’t be encouraged to be more diligent in researching until they’ve paid the price… because there are several steep prices for overlooking the process of research, and more so when it comes to (first-time) investing. In my case, these are:
- Money-wise: (the price to pay will be) the very amount of capital invested
- Emotionally: pride that got too bruised, discouraging any discussion about this experience with people who might actually help
- Psychologically: being too traumatized to “trust” any financially-profitable opportunity for quite some time
- Opportunity cost-wise: having less less money, lower spirits and inferior resolve to invest once again. This could likely make one miss the chance to make money grow
What to research? How to research?
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Performing an investigative task could be exhausting, especially when not used to it. Although I dare say that having one’s future at stake is surely an excellent incentive to do so.
From my point of view, I see two main aspects of research: the theoretical side (or the understanding) and the empirical side (the practical, “realistic” side). They require a lot of time and effort to be taken on, so you could be tempted to just focus your energy on one of them. But the truth is, both are too important for any of them to be ignored.
Suppose you’ve already decided how much you want to set aside to make your money grow; also suppose that you’re already sure of which type of investment you want to make; let’s also say that you’re currently convinced by a financial manager about the product/s he offers and that you’re very happy with what you’ve heard.
That’s fantastic because it means you won’t have to search for much more. Be that as it may, IT IS NOT THE SAME as not having to research anymore.
In our proposed scenario, the main question to ask would be: What is the general understanding regarding the investment vehicle of your choice?
Even if you’re already content and convinced about the product that was offered to you, still it’s a good habit to read and re-read the brochure or any related document.
(Depending on the country where they operate) Most financial management companies are obliged to distribute a written communication, stating the product’s fundamental information to potential investors. This is very important because usually this is where the fine print lies.
To make a long story short: you might be interested to find out about the profitability of your venture, the different kinds of fees and commissions you’d be subjected to, how much tax you’d have to pay once you withdraw your capital earnings, what kinds of risks your investment is exposed to, etc… that is to say: by how much would your money potentially grow? How much would necessarily be deducted to your money once you’ve invested it? Is there any way to prevent it, or at least lessen the deductions to your future earnings?
The second set of questions I suggest to be asked will surely empower those who are afraid of investing what savings they have acquired. It refers to one’s legal rights and obligations: Is there something in your country’s Constitution that would back you up, should you get into trouble (in the case of scams or bankruptcy)? What are your rights (ie: to invest and make your money grow) and obligations (ie: to pay taxes) according to the law? As for the financial services company, what are their rights (ie: to profit from rendering a service) and obligations (ie: transparency, honesty)?
In anything that you do, KNOW YOUR RIGHTS. ALWAYS KNOW YOUR RIGHTS. Consult a lawyer if you have to.
The most effective way to conduct empirical research would be to actually invest the money in your vehicle of choice. Just like a scientist observing a laboratory rat, you could closely monitor your investment with the help of your adviser.
Well, too bad for us- we can’t all have the luxury of “gambling” with our life savings. So for this type of research, I would mainly ask: What has been the experience of other (usually, older) people in this field?
Even if you’re already content and convinced about the product that was offered to you, talking to those who have already invested in the same product or a similar one could help. Most financial managers will hesitate to recount the negative experiences of some of their clients. So consider this: if you ask different kinds of investors (young, old, experts, newbies), they could only be too willing to warn you about not repeating the same mistakes they made. They may not share the secrets of their trade, but you could surely get some useful tips.
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Another important question to ask would be: What are other alternatives available in the market?
This question will most probably be answered by your fellow investors. But it’s always better to do your very own research. Remember that you want the best value for your hard-earned money. It’s not being greedy, it’s being wise. You’re not trying to outsmart anyone, you’re trying to educate yourself so you won’t be fooled.
Try informing yourself of the one or two better alternatives mentioned by other investors. Visit a financial service company’s office and ask all the questions you might have.
Benefits of research
Having done your research does not in any way reduce the risk of losing part (or all!) of your investment. It wouldn’t help you evade taxes either; but the results of your research will allow you to make decisions with more and better information. As a matter of fact, in the case where your decision turned out to be unfavorable, your research would’ve already provided you with enough knowledge that would orient you towards the most fitting solution.
Some might be wary of spending time to do research, even if it just meant comparing the profitability of different investment tools. Others might even think that they would do better investing their money already, instead of spending time talking to fellow investors. As respectable as this stance is, it is not advisable. Especially not to first time investors.
Undoubtedly, as you acquire more knowledge and experience about investment, you would spend less time and energy doing the basic research. By then, you would be informing yourself of different factors concerning other opportunities. You would know better who to talk to about one option or another. The task itself will not disappear, it will just take on a different turn.
People in the phase of “adulting” are automatically more prudent of their resources. Especially when it comes to their hard-earned savings. After all, that is the very essence of adulting: taking on more responsibilities and being more consistent with the decisions that were made.
One way to make adulting go a bit smoother is by taking time to research before going after one option or the other.
Whenever there is money involved, there is higher incentive to gather the right information. This becomes more evident when, along with the chance to make money grow, there is also a risk to lose part or all of it.
In general, there are two important aspects of research: the theoretical and the empirical. Both are equally important because they complement each other. That is to say, one cannot only mainly rely on hearsay when making an investment decision. And articles that are written in books, journals or magazines do not always play out the way they are supposed to. So one’s best bet would be to do both.
For the theoretical aspect, it would be wise to consult the documentation available in any financial services company. It is also highly advisable to be aware of the legal obligations and rights of both the investor and the investment company before establishing a financial relationship.
As for the empirical aspect, potential investors (especially the first-timers) would do good to talk to other investors. The latter group may not share their secret formula for success but they could warn about common mistakes and how to look out for scams. Lastly, it wouldn’t hurt to know what are the different alternatives that could fit an investor’s profile (those that adapt well to his current situation and future needs).
Researching wouldn’t make the risks go away. It wouldn’t lower the fees and commissions to be paid. Additionally, it doesn’t only take time and effort: some would also say it will make them miss the chance to invest immediately, thus losing money in the process. This type of opinion is respectable, but in the long run it will always prove to be worthwhile to exercise patience and diligence. Most people realize this too late along the way.
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