Education is paramount to success in any endeavor but when we are speaking of investing it is most important to consider its impact on risk.
Investing is widely regarded as a risky pursuit by amateurs and those who are uneducated in the field. To professional investors, a person’s education or knowledge of an investment is by far the single greatest determinant of risk. A well-educated investor can always walk away from a ‘risky’ deal.
A lack of knowledge sees so-called investors get into difficulty time and time again. Whether it’s the first time investor who just bought a house in a bad location that is losing money or the guy who thinks he’s smart because he has a nice paper profit after some blind luck in a stock market boom. Chances are that if they don’t know what they are doing they are headed down a bumpy road.
In fact, the second guy will likely have far lower lows because he’s on a high, feeling cocky and taking risks; as if his lack of education isn’t enough. Although, he IS about to get an education and an expensive one at that! Since he could be bothered getting educated from others’ experiences the market will give him the experience and education first hand.
We’ve all heard the mantra “high risk, high return & low risk, low return”. In fact, we have had it drummed into us to the point that few of us even give it a second thought, much less question it. The truth is that professional investors just don’t see it that way. They reduce their risk by getting educated.
The risk equals return mantra may hold some truth for the amateur investor who passively buys retail investment products. But then the products that fall into the “low risk” category could also be seen as risky because the returns are virtually non-existent. If you’re betting your future on that, many would call THAT risky. So this just reiterates the fact that investing is most risky for those who remain uneducated.
“What if I employ the services of a financial advisor?” you may ask. “Aren’t they educated?” Well, they are to a degree but you would be surprised how little confidence you have in many financial advisors after you’ve educated yourself a little.
More importantly though, there would be few advisors who suggest you even look at real estate because there is no personal gain in it for them. It is critical that you consider and understand the profit model for all professionals involved in your investing activities.
Professionals will only help you in the long term if there’s something in it for them. That’s perfectly okay so long as you understand it, after all why shouldn’t they benefit from helping you? But the only way to make sure your needs get top priority from your investing is to take the driver’s seat yourself. In other words, don’t outsource the ultimate responsibility of knowledge acquisition and decision making.
