Book Review: Investing 101

Soon after I started this site two years ago, Bloomberg Press sent me several books to review. I thumbed through them, but then put them on my shelf and forgot about them. Recently, while researching diversification, I pulled down one of these forgotten volumes, Kathy Kristof's Investing 101. I started reading the diversification chapter, then read another. Before I knew it, I'd read the entire book. It's a solid introduction to investing.

The mental game of investing
Kristof begins by arguing that in order to invest wisely, we must “exorcise our demons”:

We all have our demons — our little psychological hurdles that stop us from doing the things that we know to be logical, reasonable, and smart. Some of these hurdles are caused by our upbringing or culture; some seem to strike men and not women — or women and not men. But no matter the cause, we need to get over them if we're to have any hope of investing wisely enough to have more money than regrets in our old age.

I, too, believe that money is more about mind than it is about math, even with investing. Too many people make investment decisions based on emotional factors rather than facts. (I'm guilty of this myself.) Kristof attempts to educate readers so that they have the basic knowledge necessary to make smart choices for themselves.

Back to the basics
Kristof stresses that the goal of investing is to have the amount of money you need when you need it. If your goals are short-term (such as saving for a house), then focus on strategies that will give you the most money in the short-term. If your goals are long-term (like saving for retirement), then focus on investments that will provide the greatest return in the long-term. It is only by determining your investment goals that you can determine your asset allocation (which is just a fancy way of saying “where to put your money”). Kristof spends an entire chapter explaining how to diversify based on your financial goals.

She also explores the trade-off between risk and reward. All investments provide variable returns. The degree of variability, and the degree of possible return, is measured by market risk. Because stocks may return 20% one year and lose 10% the next, they have high market risk. Government bonds tend to have low market risk — their returns aren't subject to wild fluctuations, and the value of your investment is unlikely to decrease. In general, the more market risk you are willing to accept, the greater your long-term returns will be.

Kristof notes that there's no one right way to pick investments. Both Warren Buffett and Peter Lynch have had great success in the stock market, but they use very different methods of evaluating stocks. Kristof gives brief introductions to looking at fundamental indicators of a stock's value and to reading financial statements. She also writes about the difficulty of knowing when to sell.

Investing 101 includes chapters on selecting investments from several common asset classes, including stocks, bonds, and mutual funds. These sections are not in-depth, but they do provide a solid introduction to each type of investment.

A smart starting point
Investing 101 is an excellent book for beginning investors. It's not an in-depth exploration of the subject, but it's not meant to be. It's designed to introduce novices to the basics of investing, to help ease them into the concepts and terminology. The book's coverage of index funds is scant, and it was written just before the tech bubble burst, but these are minor complaints.

Investing 101 includes short chapters on socially-responsible investing, international investing, and investing in tax-advantaged accounts (like an IRA). Though I don't believe this is a book that many people need to own, it's well-worth borrowing from your public library if you've been wanting to learn about the world of investing. (You may also preview Investing 101 using Google's book search.)

If you're interested learning about saving and investing, you may find the following useful:

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Wayne Mulligan
Wayne Mulligan
12 years ago

Another amazing book for an investor at any level is, The Little Book That Beats the Market – written by a Columbia Business School professor/hedge fund manager, it was originally written for his children. So it uses very accessible language and concepts while still giving a very compelling method for becoming a great value investor.

-Wayne

Andy
Andy
12 years ago

Sounds interesting. I am starting to read about investing and am planning on putting some money into normal index funds or ETF’s soon. Maybe I’ll check this one out.

Starving Artist
Starving Artist
12 years ago

I think it’s interesting that you’re reading interest has probably kept pace with your finanical needs, JD. You didn’t really need to look at Investing 101 when you got it, because you needed to get rid of debt, not invest. So it sat on the shelf. Now you have more financial freedom, so Investing 101 makes sense.

Mydailydollars
Mydailydollars
12 years ago

That does make sense, Starving Artist. I can’t wait until I get to the investing phase and read this more closely. Nice review!

Mo Money
Mo Money
12 years ago

I will definitely check this book out, your review made it sound not only interesting, but something anyone could learn from. Thanks.

kick_push
kick_push
12 years ago

thanks for the book recommendation JD.. i’m going to borders today to check it out

Saravanan
Saravanan
12 years ago

Hi J.D,

I am a regular reader of your blog. I really enjoy reading your blog, I make it a point to read yours and Ramit’s blog.

Keep up the good work.. BTW the review sounds very interesting, but when it comes to investing, one should not be scared of experimenting. I learnt it the hard way.

Tony Tovar
Tony Tovar
12 years ago

Hey! Thanks for the recommendation! I find it interesting how the shift has been made as well. From Saving or Debt reduction to Investment! 😀 I’ve added your blog to my Feed Reading list. You have wonderful material. Also, I found the article on the highest interest bearing accounts online very very useful!

Clair Wik
Clair Wik
7 years ago

Great book! I read it several times over the years …

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