Over the next month, I’ll be posting a blog entry every day. Each post will describe a common financial term in what I hope to be casual and understandable language. The premise of this activity is that people should never invest in something they don’t understand. For example, would you invest in a machine that prevented people from aging? Such an invention could be very lucrative. Everyone on the planet could use that, and would likely pay handsomely for such a machine. However, would it be a good idea to invest in the machine without understanding how it worked? Probably not.
First, it sounds like the type of machine wherein much could go wrong, so it would be a good idea to familiarize oneself with the risks of using the machine. Second, a machine that sounds too good to be true likely is. We should understand the details of the machine so we don’t get scammed. Lastly, what are the opportunity costs of using the machine? If we live forever, are we going to miss out on some unbelievably great after-life?
I’ve realized that many of the commonly used terms in the financial world are not clearly understood by people outside the profession (and in many cases, even by “financial advisors”). There are the abbreviations: IRA, SEP, ETF, S&P, and REITS. There are the numbers: 401k, 403b, 529, rule of 72. Do you understand the various investment options available: bonds, preferred stocks, derivatives, hedge funds, annuities? Should we really be investing in any of these tools if we don’t understand them? Check back each day for a short explanation of these key financial terms.
Lastly, if there are any items or issues you would like defined, please drop me a note. If you are unclear on something, there are many people who would benefit from information relating to your concern.
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