Financial Education - Don't Blink Or You Could Lose Money
In my book about financial education, “Increase Your Financial IQ,” I wrote about four ages of humanity: The Hunter-Gatherer Age, The Agrarian Age, The Industrial Age, and The Information Age.
The Hunter-Gather Age
During this period of history, humans relied on nature to provide wealth. If you knew how to hunt and gather, you survived. If you didn’t, you died. The tribe was your social security. Everyone was poor.
The Agrarian Age
Eventually, humans learned how to plant seeds, cultivate the land, and domesticate animals. As a result, the land became wealth. Kings and queens owned the land and everyone else worked for them to take care of the land. There were two groups of people, the rich rulers and the peasants.
The Industrial Age
In the Industrial Age, resources such as copper, oil, tin, and rubber were wealth because they were used to make valuable resources. In the Agrarian Age, fertile land was valuable. In the Industrial Age, non-fertile land was valuable because it contained these resources. In the Industrial Age, a new class of people arose—the middle class. There were now the rich, the middle class, and the poor.
The Information Age
Today, we live in the Information Age, which started with the rise of personal computers. Today, information leveraged by technology is wealth. Anyone who has the right financial education, information and the ability to act in time can get rich. In other words, the price of getting rich has gone down.
Losing Money in the blink of an eye
The problem with the Information Age is that you can lose a lot of money very quickly if you blink.
The pace at which information flows and changes, and the massive amounts of information that come our way can make it very hard to respond correctly and in time. This reality makes it hard to think proactively because if you’re not careful, and you don’t have a financial education, you’ll react to every piece of information that comes your way.
Financial Education and Greece
For instance, this last week alone, there were a number of stories that came out regarding Greece. At the beginning of the week, Greece announced a referendum vote that the entire, financial world feared would cause a default on their perilous debt situation. The markets crashed.
That same week, Greece, bowing to political pressure, cancelled the referendum plan. This sent markets skyrocketing back up. And the same week still, Greece’s prime minister agreed to step down and they’re in the process of setting the stage for an interim government, which they voted on Monday. The markets are now uneasy. As one expert said, “Germany and France are closely watching these developments, because what is at stake is the future of the European Union.”
As the information coming out of Greece changed, many people made a lot of money…and many people lost a lot of money, seemingly at the blink of an eye.
Two Types of Financial Education Information
Those who lost a lot of money (or made a lot) were traders. In the Information Age, traders are in the worst position. It’s nearly impossible for a trader to keep up with the flow of information. And since they make their money through transactions, buying and selling, they are susceptible to market swings they have no control over. They are addicted to immediate information.
I don’t like to trade. Instead, I prefer to invest for the long-term in assets that cash flow and that adjust with inflation. As such, I pay attention to the operating history of a particular asset I’m purchasing and the trends over many years in the industry of that asset. I pay secondary attention to what is happening right now. I’m addicted to historical information.
If you want to get rich quick, you can take your chances with immediate information. Of course, you can also get poor fast. If you want to build a lifetime’s worth of wealth, I’d stick with historical information.
For instance, historical information tells me that every currency in the history of the world goes to zero. As such, I’m investing in gold, silver, and oil, as well as real estate. These assets go up in value as the value of a currency goes down. They’re long-term investments, and assets like oil wells and real estate also cash flow, putting money in my pocket each month.
Sure, I still pay attention to some of the immediate information. For instance, I watch the price of gold closely, but not because I want to sell my gold and make a quick cash profit. Instead, I want to know when gold goes down low enough for me to buy some more. I trust gold more than the dollar in the long run.
For the trader, immediate information rules. It’s about buying and selling at the bottom and the top. The problem is you never know exactly when that is, so you have to make your best guess. Sometimes, you make a great guess. Other times, you make a tragic one. It all depends on the quality of your information.
Invest for Cash Flow
My advice is the same as it’s always been. Invest in assets that cash flow and hedge against inflation. In order to do that, you need deep and comprehensive historical information about money and asset classes. This is why I always encourage people to invest first in their financial education.
Immediate information will come and go in the blink of an eye. But a comprehensive financial education will last you a lifetime and help you build wealth for generations.
For more information, check out the financial education resources here.