Most people’s reaction will sound like “Ugh!” and “Oh no, no chopped liver yet!” But smart people who want to get even smarter will learn accounting.
There is also a bonus, now you can do it for free. Here is the why and how:
Learn the language. “Every time you move to a new world [or country] you have to learn the language,” says Stephen Wood, chief market strategist at Russell Investments in New York. If you want to succeed in France, you will have to learn French; if you want to succeed in Germany, then at least an introduction to German would be helpful.
When it comes to invest you have to learn the language of business, which is accounting.
“If you don’t master the language, you can’t expect to do well,” says Wood.
The problem is that a large part of investing requires an understanding of what is written in the financial statements. How is a company performing? Are its sales more or less profitable than last year? Is the company expanding into new ventures, and if so, how well are these efforts serving shareholders?
The problem, like so many other things, is that when most people first look at a public company annual report, the tables on the back are incomprehensible. Financial documents are really a different language.
For many people, that’s as far as they get. They take one look, then recoil in horror and never really look at the question in detail again.
Once upon a time that could have been a satisfying outcome. This is because many people had so-called defined benefit pension plans where, upon retirement, they were promised a certain level of annual income until their death. Knowing which investments to make rested firmly with someone else – notably the employer and the retirement account they were sponsoring.
These days, such arrangements are rare.
The stakes are high. “There is a huge responsibility on the person,” says Jonathan Gibbs, investment specialist at Standard Life Investments in Edinburgh, Scotland. Most must make their own investment decisions when choosing mutual funds from alternatives in a 401(k) plan, or IRA. Or by buying individual shares.
It’s only part of the equation.
“One of the biggest changes in the world is the increase in life expectancy,” says Gibbs. The money you save and hopefully grow must last longer than it did a generation ago.
Simply put, you now have the responsibility of being a part-time manager of your retirement account and you must ensure that it lasts much longer than previous generations needed. For that, it means learning a bit of bookkeeping.
Don’t worry, though, the basics are relatively easy. Once you understand the “basic concepts,” learning your way should be “relatively simple,” says Gibbs.
Learn for free. Unlike in the past, investors can find an accounting course without having to dish out tons of cash. This is because of the rise of online courses, like the one at the University of Virginia.
“Students don’t need financial resources, just time and a desire to learn,” says Luann Lynch, professor of accounting at the Darden Graduate School of Business Administration in Charlottesville, Virginia. She did the five-week course for school and says it requires between one and three hours of study each week.
“The course will stretch them,” she says. “They won’t become CPAs when they’re done, but they’ll know a lot more than when they started.”
And that will include the ability to understand how financial accounts are compiled, what kind of decisions companies make, and how to analyze the meaning of financial statements.
“You have people in the workplace who haven’t had a lot of exposure to financial information,” she says. “But when they look back [after the course] they see how it fits together.”
Although the Darden course is free, people can upgrade for a nominal fee and earn a certificate.
Likely roadblock. “It seems to me that most people think accounting is something you have to memorize,” says Lynch. Therefore, it can be easy to be intimidated by the hardware.
But once you grasp the basic ideas, you should be able to use the concepts in many ways. More importantly, you will be able to better understand the investments you are making.
“The trick is realizing there’s a fundamental logic to it,” says Lynch. “And if they get that logic, they can apply that logic to a lot of things.”
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Stock market information as of April 17, 2017