As I continue to research my genius hour project I am learning more and more about investing and some strategies I can pass on to my students. Lots of the topics I’ve researched seem basic on the surface but are actually quote complicated once you delve deeper. One such subject is diversifying your investments. This seems like an easy concept where you simply invest in different stocks. Investing in different stocks helps you lower your risk because if one stock fails, you have money invested in other stocks that hopefully maintain their price or increase in value.
However, diversification is a much more important and complex part of investing than simply purchasing different types of stocks. First, you have to invest in the right selection of different stocks to properly diversify your portfolio. If you simply invest in only different fast food restaurants, something that affects the restaurant industry as a whole can negatively affect your entire portfolio. To properly diversify, you must purchase a large spread of stocks in different industries. Purchasing stocks in manufacturing, technology, energy etc. helps to protect your investment.
An important question to consider though, is what would happen if the stock market crashed? The answer is your entire investment would be gone and you would be in big financial trouble. All your hard work of saving, investing and diversifying would be for not. This is why it is important to diversify beyond just stocks. Investing strategy recommends you diversify in different asset classes beyond just equity. This means investing in debt, real estate, commodities, foreign equity and cash equivalents. Diversifying among different asset classes and within each class is the best way to completely diversify your portfolio and help manage your risk.
For my Genius Hour project I wanted to get an outside perspective from someone I know. For this part of the project I decided to talk to my Dad about some financial advise he wishes he would have had when he was a kid. I talked with my Dad on the phone for about 15 minutes and we discussed several aspects of my project. The main highlights covered financial mistakes he made, things he thinks young adults should know about investing, and the importance of investing early.
One of the aspects of the interview I thought was very interesting was my Dad talking about some things he wishes he had known when he was younger. One thing we discussed was the first car he purchased. Right after college my Dad decided he wanted to upgrade from the car he had driven since he was in high school. He finally had some disposable income and decided he could afford to do it. What he regrets is that he sold shares of stock he had purchased to afford his down payment. This was a poor financial decision he wishes he had been given better advice about as stocks are an investment that normally appreciate in value while a car immediately looses value upon purchase.
We also discussed some other investment advice young adults should have. One major thing my Dad recommended was to just stay informed. A big part of accumulating wealth and saving money is to know how to invest. Keeping up with financial news is an important part of that. We discussed how much information is readily available these days for investors. It’s very easy to spend 20 minutes every day reading the Wall Street Journal or following twitter accounts that provide information about public companies to invest in. Creating these habits as a young adult can go a long way and greatly improve your ability to be a smart investor down the road.
Finally, I asked my dad about his opinion on investing early. He said it’s obviously a smart thing to do, but also not something to stress about in your early 20’s. As a college student there’s just no real way for you to earn and save enough money to dramatically affect your future. He did stress the importance however of when you start working to take advantage of your 401k and any employer matching. Investing in that early especially if your employer matches at a 50% rate can go a long way to helping you save money for retirement.