Finances, barely-an-adult style(Part 3)


Welcome back for the third and final post in this odd 3 part blog trilogy. I’ll break down the distinction between gambling and investing, as well as insurance and overall risk tolerance as you get older.

Let’s start with how investing and gambling are different, and why it’s important to know which of the two you’re doing. Let’s get 1 important myth out of the way, investing is not risky if done right. If you take the average of the entire western stock market over all recorded stocks history, it has done nothing but go straight up. In the short-term stocks bounce up and down, but over a lifetime they’ve never lost out.

So how do we do investing properly? Well, investing can be done in a few different ways, like the three little bears, there are three vastly different ways to “invest” your money. Let’s start with the most boring but safest way, over diversification, being so diversified that you’re barely affected by the sways of the market at all. But what’s diversification mean? As the most basic kind of example, to be diversified means to spread your money around everywhere, to own shares of companies in different industries. So let’s say you own 1 share of a car company, a cosmetics company, a treasure hunting band, an ostrich farm, google (of course), and a hand full of others. Say we develop some new form of transportation, like teleportation or hover boards, and suddenly no one is buying cars. Your share in that car company will be worth less than before, but since you have your money spread around, it’s only a small loss. The draw back of this however is that if suddenly electric cars become all the rage and your car company shares are worth a lot more than before, you’ll get a lot less money in return because your money is spread out instead of all in the car industry.

So that’s the “too boring” sort of investment strategy, jumping ahead to the “too exciting” side of investing, this is where a lot of people destroy themselves financially. This is the opposite of spreading your money around, this is putting very cent you have in to just a few companies. Putting all your eggs in one basket. To help explain why this is a bad thing, I have 2 specific stories of people I know who shall remain nameless but have great lessons to share with others looking to invest. The first was a thrill seeker who was so close to the finish line only to get greedy and stumble that it hurts my soul just thinking about it. He was around 45, when he got the idea to invest in a gold mining operation. It’s one of those high-risk deals where they go out on a limb and hunt for gold that may or may not be there, if they struck gold he’d be rich. Unfortunately, I wouldn’t be telling you about it if they DID strike gold, so as you can imagine the opposite happened and they went bankrupt without warning and he lost every cent he had saved up. All of his savings from the age of 20 til then were thrown to the wind.

The second story is of a man who wasn’t quite as old, but had a considerable amount of savings saved up in a retirement plan. He had no experience with stocks, and being smarter than the average bear, he decided to take all of that money out and invest it in a handful of companies, he didn’t put all of his eggs in one basket, but he didn’t diversify enough to keep himself safe if he picked a bad company or two. Which unfortunately he did, one of them went under and dragged a large chunk of his money down with them. He is a smart man and did diversify a little, but when you gamble instead of invest, you have to accept that some of your choices will just come down to luck.

So finally, bringing it back down to the three bears, let’s talk about safe investing that’s also interesting and profitable. A mixed portfolio of investments can take any number of strategies, it can get very complicated and almost overwhelming at times. Which is why I like an approach I’ve heard referred to as the hull and satellite approach. Where the majority of your money is in your ship, safe inside the hull. For this large portion I personally have my ship managed by a representative at my bank in the form of medium risk mutual funds. Where as the satellite, the risk-taking portion of your portfolio, is a smaller chunk that you can play with. Hunting down companies you have a good feeling about, or have just always wanted to own, like google. (Am I making it too obvious that I want to own google shares one day?) This, among other strategies, helps keep you safe while also taking a little risk here and there.

Moving on now to insurance and how your risk tolerance should curve over time. So, let’s start with kids…. Do you have any? If the answer is no, then you probably don’t need to be paying high end life insurance that pays out millions if you die. You’ll be dead, you won’t need it. And that there is the basics of how risk tolerance should curve off over time. Firstly, I’ll say that you should have insurance, just about every kind you can get a hold of. Especially travel insurance in case you get stuck paying expensive medical bills in a foreign country because god decided to pick on you while you were abroad. But just insurance in general, the fees are a pain, and you can easily make a case for how much money you’d save by being cheap on which insurances you get and which you don’t. But just like an emergency fund, it’s not there for days when your math works out right, it’s there for that cat dying, toe stubbing, everything goes to hell day. Because just a hand full of accidents happening at the same time can utterly destroy your life without the right insurance.

The amount you get however is where risk tolerance comes in to play. How much risk you’re able to tolerate without financially screwing yourself over. To put it simply, the younger you are, the higher your tolerance should be. The older you get, the lower it should be. This plays a role in both insurance and investing, when you’re young you should be investing with a lot of risk, but as you get older and you’re getting closer to the goal you should be looking for safer and safer places to put your money. If a poor stock pick takes out all of your money when you’re 25, it’s not a huge deal, you have the rest of your working life to get it back. If the same happens to you at 55….. you’re basically looking at a retirement of eating only rice and potatoes, because those are the only things you’ll be able to afford to buy. And insurance works the same way, if you have no children, no responsibilities, and no debt then there really isn’t a need for a huge insurance package that’s going to cost you a tonne of money, and is only going to make your cat rich if you die young.(And don’t think your cat isn’t on your will, those creatures are crafty, they’ll find a way on there) Where as if you have children and a spouse you’re leaving behind who will have trouble without you there to help, it’s best to have a much higher insurance package so they’ll be able to handle life without you.(Morbid, but a good point)

That was the basics on risk tolerance, how to know if you’re gambling while investing, and a chat about insurance. So as a break down for adulthood finances we have;

1. Budget
2. Emergency fund
3. Compound interest and investing
4. Insurance and risk

As an overview I personally think that’s pretty good.(But of course I would say that, I wrote it) Keep these in mind as you go on with life and hopefully you’ll be just fine. As a closing little thought to leave you with. If you spend less than you make, invest the difference, while keeping your butt insured, you’ll turn out just fine.

This weeks advice

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