Finance for knitters: to do it or not do it (yourself)

In this post I am going to give you some reasons to invest your money on your own and some reasons not to do it.

Bookshops are full of books that promise to teach how to become rich by investing your meagre savings on your own. And so is the internet full of webpages. There is one good reason for this: very low interest rates. Usually finance advisers charge a percentage for their services. In the past, it was relatively easy to make returns that were well above this percentage and hence most people did not consider it necessary to go to the trouble of learning about investment themselves. However, in the last decades, getting high returns has become a lot more difficult. It is already non trivial to simply beat inflation and it takes a lot more to "beat the market". The result is that, except if you can afford really good advice, you can see your returns being significantly diminished after paying the fees, that is, if you are lucky. If you are unlucky, you may even loose your money. There is also one bad reason for finance gurus to give away advice so cheaply, which is that the zero sum rule of bookkeeping does not entirely hold true in the stock market, but it still does to great extent. This means that when, for example, Warren Buffett makes a million, someone probably lost a million too. The reason why this someone is not as famous as Buffett is not only because people like success stories a lot better than failure ones, but also because this someone is probably not a single person. Usually this someone is more like a million small investors who lost one pound each. That is the reason why finance gurus are so keen on convincing everyone to invest. Not only they make money in royalties from their books, conference talks, etc., they are also hoping to make a profit by grabbing some money from the people who follow their silly advice.

So what are the reasons to learn about investment and invest on your own?

• Finance is a relatively simple subject. A relatively small time invested in learning the basics and building an investment plan that suits you can, in the current economical situation, easily yield higher returns that the ones provided by a bank/financial adviser/etc after their fees are discounted. However, be aware there is a rule in finance: the higher the returns, the higher the risk. You are not an expert, you do not have inside information, you are not so rich that you will not miss the money you have lost. Either you understand you must curb your ambition and built a very modest earning portfolio, or you are sure to loose money.
• Know that good financial advisers charge a lot of money for their advice. This means that, since they charge a percentage fee, they only accept clients that have a lot of money to invest. For those more modest investors who do not own a fortune, the advice they can afford is very often of very unreliable origin. There are plenty of people working in the business that do not have either high qualifications or high intelligence or common sense. There is also plenty of charlatans. This is another reason why you may want to take the matter into your own hands.

And what are the reasons to take your money to a professional instead?

• Time. It may not be necessary to work full time on managing your own finances, but are you sure you do not have better things to do? The difference you will make will probably be not so great and you may easily find a more profitable way of spending your time. And you only live once, so maybe you should invest the time in yourself and your happiness.
• Peace of mind. As aforementioned, you are not an expert. In addition, you may not have the right personality to handle your finances. Beware that the only way to make money in the stock market is to be prepared to hold to stock even when the value is going down, and you are loosing a lot of money, in the hope that it will go up again. This takes cold blood and patience. If you sell every time the price goes down and buy every time it goes up, you actually loose money. Beware that investing in the stock market can be a lot like gambling and you can easily loose as much money investing as gambling, if you do not have the right attitude.
• The best advice a normal person can get is to take their money to a good financial adviser if they know one.

Finally, I am going to finish with reasons not to invest at all:

• Do not invest if you have debts. The chances that you will be able to make more money than the interest you are paying on your debt are very slim. Some people may argue that a mortgage is an exception to this rule, because mortgage interests are usually quite low, but I am not so sure.
• Do not invest if you will need the money in the short term. Stock prices actually go up and down randomly in the short term. So, the only way that profits can be safely made is by investing wisely in the long term (decades not years, much less months).