Money is an important part of marriage. Marriage is not about money, however, you've probably heard people say that money can cause problems in a marriage. Maybe you've even experienced it yourself. But to a degree marriage is a business partnership: you purchase assets together, manage expenses, generate revenue, and enter into contracts (utilities, cell phones, subscriptions, etc.). The difference, however, is that the goal of marriage is love and happiness while the goal of a traditional business relationship is money.
Earlier this week my sister and her husband invited Cami and I to go bowling with them. As we hadn't been bowling in many years and we enjoy spending time with them we accepted their invitation. Last night was the big night. We found a babysitter (Cami's sweet little brother), hit the road, and had a great time. I lost each of the games we played but in spite of that I had a good time.
On the car ride back my sister began asking me about investing. I'm in no way an expert but I've been learning from a friend, who is a chartered financial analyst (CFA), for a few years so I have a pretty good grasp of the basis. I'm learning that this is more than most people. Because of this, and because I realize that there are many younger couples that read my blog, I'm going to take a minute today and explain the very basics of investing. I know that this isn't my traditional blog post but because money is important to a marriage I feel like I can get away with it. :)
Shares of Stock
Businesses have owners. Sometimes it's just one owner who owns 100% of the company. Other times it's a partnership where two people each own 50%, three people who own a third each, etc. Unless the business is a non-profit company it has at least one owner. Ownership in a company is also referred to as having stock in a company.
Ownership of a company, or stock, can be bought and sold just like cars, houses, toothbrushes, etc. The value of the stock is based on the value of the company. If the company is worth $100,000 and there are 1000 shares of stock then each share is worth $100. When the company's value increases so does the value of the share of stock and likewise when it decreases the value of the stock goes with it.
Now there is a lot more that is involved in valuing an individual stock but this is basically how it works.
Many years ago some bright individual realized that the average person doesn't have the time or understanding to routinely and successfully invest in individual companies so they created a mutual fund. They got a bunch of people to each contribute a sum of money, let's say $100, and used that money to purchase shares of stock in individual companies. The mutual fund manager makes the decisions about which stocks to buy, when to buy them, and when to sell them. As the overall value of the stocks that the mutual fund owns increases so does the value of the mutual fund (the reverse is also true, mutual funds can lose money. Investing is not a sure thing).
The individuals who contributed the initial $100 can then sell their ownership in the mutual fund (their share of the mutual fund though it's not typically referred to this way) to another person. In this way membership in the mutual fund, or ownership of it, can be bought and sold similar to how individual stocks are bought and sold.
Rules of Thumb
Here are three general rules of thumb that I initially learned from Dave Ramsey and have been reinforced countless times by my CFA friend.
#1 Think long term. Investing for the short, in my opinion, is for experts. For people like me I recommend that they invest with a long term perspective. Looking at the S&P 500 (a stock exchange where companies can list their stock for sale) the average annual return since the 1920's is 11.34% (see here). That means that if history repeats itself (there is no guarantee that it will) you should earn between 11% and 12% at least. Therefore, look for mutual funds that have a return of at least 11% since their inception.
#2 Make sure to look at the return of the mutual SINCE ITS INCEPTION. This means since it was first started. You want to make sure that its management is solid and has a good track record. Also make sure that it has been around for at least 10 years. Again, this is no guarantee that it will continue to perform as it has in the past but it is much more likely.
#3 Think long term. Yep, that's right. It's so important I've put it twice. When my wife and my retirement plan makes money I tell her the good news. When it loses money she doesn't know a thing. I used to tell her no matter what was happening but we quickly realized that when the value of our retirement plan is down she kind of panics and wants to pull all of our money out. So, to help her keep a long term perspective I only tell her when it's good news. :)
Again, I want to reiterate that I am in no way an expert and these are merely my opinions but I have put these principles into practice in my life and am already seeing success (I've only been investing for six years). There are no guarantees when it comes to investing (I often refer to it as professional gambling) because no one can predict the future but if you're diligent, willing, and careful it can be a great way to build wealth.
To help you learn more, if you're interested, here are a few websites that I find helpful:
- Dave Ramsey's "The 12% Reality"
- Investing for Dummies
- Virtual Stock Exchange (this is a game environment where you can trade in the real market but, as my children would say, "for pretend")
As with anything, consult a professional if you have any questions.
Let me know what you thought about this post in the comments. Did it help? Do you have more questions now? Was it too off topic? I love and appreciate your feedback!