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I write this column because I want to help you and save you from being taken advantage of while you are looking for options to invest your money. I am going to be brief, in the hopes that everyone reads the entire article. I deal too often with this particular issue. Certain terms can be confusing and are often used without fully understanding what they mean. I hear terms misused often by friends and clients. It wouldn’t be that big of a problem, except for the fact that I know if people are talking like this with me, they are probably speaking the same way to other people in my industry. I have had to say this same thing in some of my past articles, sadly, not every Financial Advisor out there is a decent and moral person. If you say something wrong, that could be an indicator to them that they could sell you on anything because you don’t know any better. I don’t want that to happen to you.
You need to know the difference between an investment and an account.
Some of you may be laughing right now. That’s because you have some kind of foundational knowledge on this subject, but I promise you, a lot of people get confused about this. This may be new information for you or it could be a friendly refresher. Either way, this is something that comes up in conversations a lot. It is important to understand the difference between these and understand the most common terms.
I like to use the term “investment vehicle”, rather than “account”. The simplest comparison I can think of is how you put cash into a bank account. You put investments into investment vehicles.
Yes, there are plenty more investment vehicles and a whole lot more investments. These are just some of the most common ones that I come across. What caused me to write on this subject this week is sometimes I have conversations with people and can tell that they don’t understand the difference between these two terms and how they relate simply by how they use these terms. Probably the most common indicator that I see is when someone talks to me about their 401k. When I say something like, “ Great! You are contributing to your 401k! What are the investments that you hold?”. More often than not, they don’t know much more than the name of whatever large fund company is managing the account. This tells me that they really don’t have an understanding between the investments and the investment vehicle. To them, their 401k is just this magical savings account that grows faster than their bank savings account.
Another thing that I hear often is, “I contribute to my mutual fund every month.” This one is great because it opens up the conversation for me. This gives me the opportunity to go into the same detail as with this article. I usually reply with something like, “Cool, you are invested in mutual funds. What kind of an account? Are you open to having a conversation so I can better explain what you have?”
The main takeaway here is that there is a difference between investments and investment vehicles. Almost any investment that I have listed here can go into any of the different investment vehicles that I have also listed. Using these terms correctly will show that you somewhat know what you are talking about. Having a basic understanding of your financial situation is important for many reasons, but also arms you with the knowledge you need to protect yourself when choosing the right financial advisor for you and discussing your investment options.
Examples are hypothetical and for illustrative purposes only. The rates of return do not represent any actual investment and cannot be guaranteed.
Registered Representative, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, member FINRA/SIPC.
Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Garner Wealth Management LLC and Cambridge are not affiliated.
The information in this article is not financial advice.
Diversification and asset allocation strategies do not assure profit or protect against loss. Past performance is no guarantee of future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including loss of principal