Education is important. It is the best way to learn and gain new knowledge. But you would have realised that schools hardly include any financial or investment lessons in their curriculum. It is as if they find that these are not important.
But NO! That is certainly not the case.
Having some basic financial literacy will go a long way in helping with your finances. Being able to come up with some simple budgeting for your monthly income is a vital skill.
Learning investment lessons don’t require a lot of time and they are simple to understand. Here are 3 investment lessons to get you started.
Investment Lessons (1) – Rule of 72
The Rule of 72 lets you quickly estimate how long it will take for you to double your investment capital with compound interest, assuming a fixed annual rate of return. All you have to do is, use 72 and divide it by the current return that you are getting.
For example, if you invest $1000 and this investment promise to give you 6% returns a year. Take 72 and divide by 6, you will get 12. So it will take 12 years for you to double investment capital of $1000 to $2000. This is what the rule of 72 means.
The rule of 72 is useful because it lets you quickly gauge how long it will take for you to double your initial sum.
And you can also use it with inflation, to see how long it will take for your money to halve in value. The process is exactly the same. Use 72 and divide it by the inflation rate.
For example, assuming the inflation rate is 3% and you have $1000 that is sitting under your bed. Using 72 and divide it by 3, your $1000 will lose half its value after 24 years.
And you can also see for loans with high interest rates like credit cards, which can easily charge 18% a year. Your credit card loan can double in just 4 years!
If you want to see how the maths is done for the Rule of 72, click here
Investment Lessons (2) – Dollar Cost Averaging
Dollar Cost Averaging or DCA is a method to slowly increase your position in an investment. This is done by investing a fixed amount of money at fixed intervals. A simple example of DCA is to invest $1000 every month into a stock.
For example, you use $1000 every month to buy shares of Disney.
For January the price of Disney is $100, so you bought 10 shares of Disney.
In February the price of Disney rose to $200, so you bought 5 shares of Disney.
But in March, the price of Disney was $50. So you managed to purchase 20 shares of Disney.
In total you invested $3000 into Disney and bought 30 shares over 3 months and the average price you paid per share is around $85.
The benefit of DCA is, you will average out the price you pay for the stock because you will invest the same amount regardless of whether the stock price seems “high” or “low”.
Another benefit of DCA is you will not let your emotions affect your judgement. You will just follow the process and invest a fixed amount every month. You will not be hesitant to buy the stock even it seems expensive, because you know when the stock becomes cheaper, you will buy more. So this gets you started and helps you overcome the fear of investing in stocks when prices seem “high”.
Stock markets also tend to increase in value over time, especially blue chips stock. Read about what blue chips are and how you can get started over here.
Investment Lessons (3) – Mr Market Opportunity
Mr Market is a character created by Benjamin Graham to help investors view the stock market as a person. Benjamin Graham is also the mentor of investing Guru Warren Buffett.
Here’s how the story goes.
The stock market can be thought of an individual called Mr Market. Mr Market has extreme mood swings. On some days he can be very upbeat and optimistic about the future. On other days, he can be very unhappy and pessimistic about the future. But without fail, every day Mr Market will go to your house and offer to buy your stocks.
When Mr Market is very optimistic and happy, he will quote you a very high price for your stocks as he believes that your stocks have the potential to go higher and higher in value.
Now other days where Mr Market is depressed and upset, he will offer a very low price for your stocks. As he feels that your stocks are not worth much and he thinks you should sell them off quickly.
You have the choice to choose whether or not you want to accept his offer and sell him your stocks.
He will not be offended if you reject him, nor will he feel happier if you sold your stocks to him.
Regardless of what decision you make, tomorrow Mr Market will come to your house again and offer to buy your stocks.
Now what Mr Market represents is the daily fluctuations of the stock market. Stock prices can move up and down quickly. When you own stocks and see their prices drop, you might be tempted to quickly sell them. But it is important to know the true value of your stocks or commonly known as intrinsic value.
If the stock that you own is worth $50, will you sell when Mr Market is depressed and just offer $20 for the stock? But what if Mr Market is optimistic and offers $80 for your stock? I am sure you will sell it in a heartbeat (Take everything I own!) Because he is paying you more than what it is worth.
The story of Mr Market is to tell investors, don’t be caught up by the daily fluctuation of the stock market. Prices will rise and fall and it can seem very gloomy but as long as you are holding strong stocks like blue chips, you should be confident in them. In the long term, their prices will always rise.
The story of Mr Market also applies if you are trying to buy stocks. If you missed a great opportunity to buy, don’t get distraught over it.
Never get upset over a missed opportunity or thinking you “lost” money because you did not act quickly enough. Just be patient, Mr Market is always going to come to you with other opportunities in the future.
You Need This If You Use Money
Financial literacy is important. As long as you use money in your daily life, then you need to be financially literate. But luckily this skill not difficult to understand and anyone can learn it. Make a decision today to begin your learning.
Control your finances and achieve financial freedom. Don’t let your finances control you.
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