Six months after I was married, as I was writing up my Ph.D. in Environmental Economics, my wife had a stroke. With a pile of medical bills to pay off and suddenly put into sole breadwinner status, I dropped my Ph.D and went to work as a computer programmer. The fantasy since that time has been to make a big enough fortune that I could afford to restart the Phud. It hasn't happened yet, but I have been quite successful and I am probably making at least what I would have made as an Economist.
Once the bills were paid, I realized that I needed to start saving and investing. But I didn't have a clue how to go about doing that in a sensible fashion. It was time to start reading.
Here on DK, I also see a lot of comments asking personal finance and investment questions, especially now that current markets seem to be more unsettled than they have been in a while. So without further ado, here is a reading list for those who want a better understanding of their own personal finances and investment strategies. Knowledge is power.
Before you even think about beginning an investment program, you need to be sure that your personal finances are in good shape. There are several items to consider.
- Do you have 3-6 months of emergency funds? Are these funds in an easily reached form (e.g. a checking, savings, or money market account)? You don't want to be in the position of having to sell an investment just as the market has crashed in order to cover a personal emergency.
- Do you have adequate insurance? You should have proper amounts of coverage for life, health, automobile, home and liability, and (too often overlooked) disability insurance.
- Have you paid off your credit cards and other high interest loans? This is often the best investment you can make. If you can earn a return of, say, 10% in the market, but must pay 14% for your credit cards, you can make more money by paying off the loans than by buying stocks.
- Have you set goals for yourself? Do you know why you are investing? Investment strategies for a long-term retirment program differ from those required for a shorter-term goal such as saving for a down payment on a house.
- Do you have a structured savings program? Do you (agghh, horrors) have a budget? Both of these tools can help you to find the funds you will need in order to begin a sensible investment program.
There are two books that I can highly recommend on the subject of personal finance. Each of these covers the points listed above as well as how to choose a bank, your credit history, buying a home, tax deferred savings plans, the basics of social security, and much more. The Consumer Reports Money Book: How to Get It, Save It, and Spend It Wisely by Janet Bamford, Jeff Blyskal, Emily Card, Aieleen Jacobson, with Greg Daugherty and the Editors of Consumer Reports Books. I've got the 3rd Edition, but there are later eds. Making the Most of Your Money by Jane Bryan Quinn. This hasn't been updated in a decade, but it is still very good.
With the basics out of the way, you are ready to start. Burton Malkiel's A Random Walk Down Wall Street is required reading. If you are not willing to read it, stop here, put your money into CDs and do not go near the markets. The financial industry will screw you.
Once you have read Malkiel, go straight to Vanguard or TIAA-CREF and buy an index fund. Why an index fund? Malkiel will walk you through the details, but the basics are 1) low cost 2) most mutual fund managers cannot beat the indexes 3) even when they do, the extra costs they charge will kill whatever extra performance they do generate 4) you have to guess today which active fund manager will beat the market tomorrow since you don't know the future and 5) did I mention low cost? - index funds have the lowest costs and cost is the one thing you can predict. John Bogel, former chairman of Vanguard and the man who really started the index fund trend, is the author of The Little Book of Common Sense Investing. It is a great supplement to Malkiel. Which index fund? Simplest answer is to just buy the entire market and forget about it. Vanguard offers a fund that matches 99.5% of the US market. TIAA-CREF offers one that matches 98% of the US market.
But if you want to branch out, you should read Jeremy Siegel's Stocks for the Long Run and James O'Shaughnessy's What Works on Wall Street. These will start to give you a feel for the research on large-cap vs. small-cap, value vs growth, the roll of dividends, etc. My biggest complaint is that until recently, it has been impractical to implement these strategies with mutual funds. But Vanguard has recently introduced some index funds that do attempt to mimic some of these ideas.
That is pretty much where you need to start your reading. I'll toss in three more for those who aren't convinced that index funds are the only way to go. If you really think you want to try your hand at picking individual stocks, you will want to read The Intelligent Investor by Benjamin Graham and Common Stocks and Uncommon Profits by Phillip Fisher. Graham is the father of value investing and was Warren Buffet's teacher. Fisher is the classic on growth stocks. Finally, the classic textbook, for those who want to understand the basic theory of modern finance, is Nobel Prize Winner William Sharpe's Investments.