Investing for The Individual Investor

Investing can be a great thing. Although, in recent times the market has taken quite a fall investing over a long period of time will not leave the individual investor disappointed. If I were to recommend any two books for the individual investor they would be "A Random Walk Down Wall-Street" by Burton Malkiel and "Stocks for The Long Run" by Jeremy Siegel. I should note these books are not just fads but have stood the test of times when it comes to investing. In Random Walk Malkiel discusses the Efficient Market Hypothesis which simply states that no one can beat the expected returns of the market year after year consistently. Malkiel recommends that the individual investor invest a wide variety of mutual funds to diversify. Diversification is a great idea because instead of putting all your eggs into one basket your risk is spread across many different investments. Siegel talks about how stocks are actually one of the safest forms of investing when looking at performance compared to risk and inflation. Siegel describes how over 30 year holding periods stocks have statically done better then bonds, Treasury bills, or CD's.

The recent market meltdown has given a bad name to the financial services industry. This industry does serve the public a very important function. I wanted to take some time to discuss the different groups within the industry. When you see commercials for Charles Schwab or Merrill Lynch these types of companies are known as broker-dealers. Broker-dealers usually have millions of accounts with hundreds of brokers trying to sell individuals different financial products. Brokers make their living selling you different insurance policies or mutual funds. The SEC regulates broker-dealers to make sure they are not doing anything illegal or unethical. The problem I see with broker- dealers is they have an incentive to sell the individual investor products instead of actually looking at the whole financial picture. Think of a broker as a doctor who keeps prescribing you different medication. Each time you get prescribed medication it costs you money which over time will affect your performance. On the other hand there are Registered Investment Advisors. This group is smaller than broker-dealers but they are bound by the SEC to put the client's financial interests above their own. When it comes to designations there are so many within the financial industry below I talk about the differences between them:

CFP (Certified Financial Planner)- CFP’s look at everything at the whole financial perspective of a person and most likely do a financial plan for them. These people are educated in investments, insurance, estate planning, retirement planning, and tax implications. To become a CFP one must take 5 individual tests along with a 10 hour comprehensive exam. Study time is around 300 or more hours.

CFA (Certified Financial Analyst)- This designation is for either investment professionals or sometimes people in corporate finance. Many times investment banks look for this designation in prospective hires. The CFA is much more technical then the CFP. One CFA summed it up quite well, "CFP is the shotgun approach, while the CFA is a sniper approach to investing". CFA focuses on statistics, equity evaluation, economics, and financial analysis. To become a CFA one must take 3 (6 hour) tests in order to become designated. The average study time for each exam is around 300 hours for each exam.

CPA- most people know what this designation is. These people are well versed in accounting and pretty good when it comes to taxes. Although, CPA's are usually not very focused on the investing side they can save people money with tax strategies and tips.

Series 7- general test in order to become a stockbroker

Using any professional with one of these designations will leave you better than getting a brother in law or someone you know when it comes to your financial matters. Also be weary of broker-dealers since they have their own incentives for you to switch products or buy insurance policies that you may not need.