Many errors in personal finance can be prevented. But first, people need to understand what they ought to do, says the Nobel Prize Winner and economist Robert Shiller. It is true that many people bet in markets and do investments that they do not understand. They follow the advice of friends that boost about their expertise. How could it happen that so many prominent personalities have got trapped in the Madoff case? They just handed him over their assets because they heard from others saying that it must be a safe and profitable investment. Others follow blindly the herd of small investors if a new bubble blows itself up. Everybody fears to miss a unique opportunity to make fast money, but the investment cycle is already in a late status. The crash is near if the herd of small investors start to invest at the all time high prices of assets and most of them will be the losers. The professional investors already have moved out.
Education and common sense are needed
The People need to be able to make up their mind independently. They should learn about the basics in financial markets, personal finance and investments. Why? Independent and competent advice is rare. The big rating agencies have failed. They have valuated the assets that have turned out to be toxic with a Triple A. They are not independent because they are paid by the borrower of the money, not by the lenders. The clients also may not rely on the advice of their banker, even if they know him for years. The portfolio adviser at the bank is not independent. His target is not to make the bankers client rich. He has at first to achieve the turnover targets of the bank. His bosses tell him which and how much securities he has to sell to his customers.
The people have to help themselves
The people should acquire some basic knowledge to settle their money management. There is a lot of literature about financial market science, portfolio management, real estate investments offline as well as online. There are some rules of thumb that are valid for all situations:
People should learn and understand what they do and how specific securities work:
1. They should abstain from unclear financial instruments that are difficult to explain.
2. They should be aware that high yields mean high risks.
3. They should not follow blindly hot tips by their friends.
4. They should question and question their bank adviser. They should not feel ashamed if they do not understand anything. If that is the case, it is time to be alert.
5. They should not follow the herd of small investors, if everybody believes in an endless, money creating boom. The crash of the bubble could be close.
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