Financial literacy means that you grasp these basic financial concepts. Without it, you’re unlikely to become wealthy.
Financial literacy is a must for every adult, yet few high schools, if any, teach it. And as a recent Standard & Poor’s survey demonstrated, many people aren’t getting the knowledge they need elsewhere. The survey found that only 57% of American adults could correctly answer three out of four basic financial questions and get a passing score. Take a look at some of the questions they were asked and see if you would have made the grade.
Survey question: Is it safer to put your money into one business or investment, or to put your money into multiple businesses or investments?
Diversification means that owning several different types of investments will reduce your risks compared to owning just one type of investment. For example, if the S&P 500 Index drops by 30% and you have all your money in an S&P 500-tracking index fund, then your portfolio will lose 30% of its value. But if just half your money is in stocks and the rest is in other types of investments, your portfolio will lose only 15% of its total value instead.
How you can best allocate your investments will depend on your investment goals and time frame. For retirement investments, one common approach is to subtract your age from 110 and put that percentage of your funds into stocks, with the remainder in bonds.
It’s a good idea not only to spread your money across different asset classes, but also to diversify within asset classes. For example, don’t put all your stock money into a single stock. Instead, invest in a broad array of stocks. The easy way to do this is to invest in an index fundthat owns shares of hundreds of different stocks, so if one stock goes bust, you won’t lose all your money.