The promise of retiring with a government-provided pension such as that espoused by Social Security seems to be fading quickly. The US government’s own admission is dire, “The Trustees project that the combined trust funds will be depleted in 2034.” The idea of these types of pensions was based on a model wherein employees and employers pay some small amount of their regular earnings to a fund managed by the government. Upon retirement, the employee earns a pension income. Unfortunately, the model presupposes that there are more active employees paying into the fund than receiving benefits. In light of a continuous baby boom, this may work, but that is not the case any longer.
After WWII, there was a baby boom which caused a bulge in the population. As these children aged and entered the workforce, Social Security was feasible because the math worked. That is, there were more employees paying in than getting paid out. Now that the baby boomers have entered their retirement years, the amount being paid exceeds that being collected by working employees. This is due to declining birth rates across most first-world countries. In particular, there are less replacement workers funding the retirees. Add to the fact that like most government programs, it has been mismanaged and the funds largely squandered. So as the Social Security Administration admonishes us about the reality of this massive shortfall, what can a working age employee do? Is it reasonable to hope that pension money will exist upon retirement?
It seems prudent that the current batch of employees take more control of their investments. It sounds like common sense to be able to manage one’s own financial affairs, not only to help prepare for retirement, but also to grow the portfolio to amass some wealth. The more that the investor is empowered with knowledge, the better he/she can decide what to do with the investment capital. But how to get started?
Well the goods news is that acquiring knowledge is something that humans have an innate ability to do. It just takes some time and effort. Today, there are many resources available to learn about the markets and investing. Ultimately it boils down to performing some sort of analysis to gather information to help make more informed decisions.
The first main form of analysis is fundamental analysis. This is a process that an investor uses to examine underlying data about an economy, market or specific asset. The idea is to gauge the value of something based on data such as balance sheets, income statements, and various other factors such as earnings, debt, price of asset, etc. Literally, there are a myriad of factors to examine. Upon compiling the data, the analyst would then determine if the asset (e.g. stock) is over-valued, under-valued or is fairly priced. If the asset is under-valued the investor may choose to buy that asset in some form (e.g. buy some shares). If it is over-valued, perhaps he/she may choose to short the asset if that is practicable.
The second main form of analysis is called technical analysis. This strictly focuses on past price action to predict a possible future price. A technician will delve into price charts overlayed with indicators such as moving averages, stochastic and others. In addition, he/she can examine patterns such as the cup-and-handle, or look at Elliot Waves to predict where the future price action might be. There are literally hundreds of indicators and patterns that can be examined. Again, if a probable price action is expected, the investor can buy or sell as the case may be.
Leverage Crowd Knowledge
Clearly the two major avenues for investment analysis can be time consuming. For any one person to be able to study all markets, every day, with either method, let alone both methods, approaches the impossible. Furthermore, it could take years of diligent study to become proficient in these areas. Fortunately, there is now another option available that can reduce the time and workload required for any one person.
This is called social investing. Essentially, social investing leverages the crowd and collaboration to disseminate information which empowers individual investors. The larger the community, the greater the benefits to the network as more investors share information. Therefore, more knowledge can be spread and more time is saved by farming out the work. No longer does one person need to study bags of markets. Instead, he/she can focus on a small subset and become really good at analyzing that sphere. When that investor shares his/her analysis with the community it results in giving others more decision-making power. In turn the other analysts share their findings for other assets, markets or economies feeding the broader network.
As part of this sharing process, critiques are offered and debated. Effectively, the community “prunes” away the false and least valuable information. In the end, everyone constantly has access to good quality analysis and each investor can specialize in his/her desired market.
Social networking is now an accepted and vastly used form of communication, organizing and sharing. Social investing is simply applying this concept to the markets. If individual investors can find value in sharing market information and analysis with others in a network, everyone participating wins. Hopefully, adopting social investing can help many investors take control of their investment capital and provide a means to securing a retirement nest egg as well. Consequently, they will not need to depend solely on government pensions.