Administrative Sciences Chair Offers Finance Tips for Rookie Investors
Dr. Irena Vodenska—professor of finance, director of the MS in Financial Management (MSFM) program, and chair of the Department of Administrative Sciences at BU MET—lent her professional and academic expertise to The Ascent, weighing in with tips for first-time investors, clearing up common misconceptions around stock trading, and providing guidance for how consumers should decide on the best stock brokerage for them.
Drawing on lessons she teaches in Financial Regulation and Ethics (MET AD 678), a core course for the MSFM, as well as in Investment Analysis and Portfolio Management (MET AD 717), a required specialization course for all the degree concentration programs, Dr. Vodenska reminded that investments require patience and that success is not always a straight line.
Read the interview from The Motley Fool’s The Ascent below.
Dr. Vodenska: First-time investors can be very different, so no single piece of advice is appropriate for all of them. If we assume that the first-time investor is a young professional, for example, in their first job right after school, they have a long investing horizon in front of them. Hence, they can be more aggressive in selecting a portfolio, mainly comprising US-based domestic, or even international equity. These young investors are in their savings part of the investment horizon and do not require short-term liquidity so that they can afford riskier investments, at least with a portion of their portfolio. Another consideration is the level of the risk-averseness for these first-time investors. Even if they have a long-term investing horizon and low liquidity requirements, first-time investors may opt for safer investments if they are very risk-averse. In that case, instead of equity (stocks), fixed income securities (bonds) will be more appropriate.
The Ascent: What is a common misconception about investing?
Dr. Vodenska: Investing is an individual choice. One of the common misconceptions about investing is that investments always have positive returns, i.e., if you invest, you will earn money at all times. This belief might be true on average, measured as a cumulative return over many years. However, the performance of an investment portfolio could be volatile, i.e., experiencing both negative and positive returns periodically. Another misconception about investing is that anyone who invests in financial markets will become rich quickly. While this might happen, it is not the norm but rather an exception. A third misconception could be that investing is trading, which is not the case. One can think of trading as short or very short-term investing; however, investing, per se, implies a long or a very long-term holding of the purchased securities, accompanied by a low-frequency rebalancing of the portfolio.
The Ascent: How can investors feel more confident when choosing a brokerage?
Dr. Vodenska: Excellent question. Investors should consider very carefully whom they choose to trust with their investment decisions. There is a distinction between a brokerage and an investment advisory firm. Brokers engage in the business of effecting transactions in securities for the account of others, for which they receive compensation. When brokers recommend securities to their clients, they must ensure that the investment is “suitable” for the client. On the other hand, investment advisors advise others about investing in securities and receive compensation for the advice. When investment advisers recommend an investment to their clients, the investment needs to be in the “best interest” of the client. These differences are essential and create two different standards of conduct: 1) Suitability for brokers and, 2) Fiduciary (“best interest of the customer”) for investment advisers.
Investors should know the difference and, before entrusting their investments to securities professionals, they should ask whether they are a “fiduciary”? Investors can be confident if the answer is, “Yes, I am a fiduciary.”