If you have 3 minutes, then read our uncomplicated, short and free crash course of the GFC.
Every financial crisis teaches us invaluable lessons about the financial world, the stock market and how to make money. Here are 3 vital lessons that I learnt from the GFC that every young investor must understand.
Lesson 1: It is not how much money you earn but what you know that gets you rich
Young investors often ask how much money should I have before I start investing? People may say $1000 or $5000. However, the real answer should be once you understand a business/ have knowledge of an upcoming price sensitive event and have undertaken research then your starting point doesn’t matter. Why?
A large sum of money can generate wealth don’t get me wrong. However, if you incrementally increase your wealth through small investments it can accumulate to an eye watering balance. Small investments could be weekly, fortnightly, monthly or annually. Just try not to sit on the fence all the time. Instead read about the price sensitive events coming up. Because news and emotion drive the market.
The investors who profited from the GFC, used their knowledge of the inevitable collapse of the housing market to purchase credit default swaps.
I’ll sum up this lesson with a quote from Rich Dad Poor Dad – Robert T.Kiyoskai
“It’s not investing in gold, silver and aluminium that gets you rich, it is what you know about gold, silver or aluminium that gets you rich”
Lesson 2: Focus on the important information
We live in a time where information is everywhere. However, infinite information creates two problems.
- Everyone has access to the information
- An abundance of information is overwhelming
Now while it is important to keep up with the news. Reading the Sydney Morning Herald, WSJ, Australian Financial Review or the news can be a mouth full. Being bombarded with information can lead to panic or just deciding to do nothing.
Instead, focus your attention on a few information sources. Do not let the news consume all your time. Because once you read something, sooner or later your uber driver will know about it. Then it’s definitely too late to invest.
Relating back to the GFC, people who focused on understanding the housing market and not the false statements from the banks profited from the crisis, as sad as that is. Thus, once you read something it is vital you connect the dots quickly to turn the information into profit.
Lesson 3: Putting money in your bank will not improve your financial situation
The GFC broke the trust between individuals and the banks. The divide was not a negative outcome.
Because, when you don’t rely on the banks interest rate to make you money you learn a valuable lesson. That is saving money in a bank benefits the institution more than you. Thus, learning about alternative ways to increase the return on your money: eg. Stocks or investment properties is a start.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Associate of YIG.