There’s no reason for the average investor to not know some basic accounting.
The reaction of most people will be something akin to “Ugh!” and “Oh no, not chopped liver again!” But smart people who want to get even smarter will learn accounting.
There’s also a bonus, you can now do so for free. Here’s the why and the how:
Learning the language. “Whenever you move to a new world [or country] you need to learn the language,” says Stephen Wood, chief market strategist of Russell Investments in New York. If you want to do well in France then you’ll need to learn French; if you want to do well in Germany, then at least an introduction to German would be helpful.
When it comes to investing you need to learn the language of business, which is accounting.
“If you aren’t conversant with the language then you can’t expect to do well,” Wood says.
[See: 10 Long-Term Investment Strategies That Work.]
The issue at hand is that so much of investing requires an understanding of what is written in financial statements. How well is a company doing? Are its sales more or less profitable than last year? Is the business expanding into new ventures, and if so how well are those efforts serving the shareholders?
These are the sorts of questions that reading the financial statements can provide.
The problem, as with so many things, is that when most people first look at an annual report from a public company the tables at the back are incomprehensible. Financial documents are truly a different language.
For many people, that’s as far as they get. They take a peek, then recoil in horror and never really look in detail at the matter again.
Once upon a time that may have been a satisfactory outcome. That’s because many people had so-called defined-benefit pension plans where upon retirement they were promised a certain level of annual income until they died. The knowledge of what investments to make was firmly on the shoulders of someone else — notably, the employer and the pension account that they sponsored.
These days such arrangements are a rarity.
The stakes are high. “There is a huge amount of responsibility on the person,” says Jonathan Gibbs, an investment specialist at Standard Life Investments in Edinburgh, Scotland. Most have to make their own investment decisions through picking mutual funds from alternatives in a 401(k) plan, or IRA. Or through buying individual stocks.
[See: 9 Under-the-Radar Ways to Buy Financial Stocks.]
That’s only part of the equation.
“One of the biggest changes in the world is the increase in life expectancy,” Gibbs says. The cash you save and hopefully grow has to last longer than it would have a generation ago.
In the simplest terms, now you have the responsibility to be a part-time manager of your retirement account and you must make sure it lasts far longer than was needed for previous generations. For that, that means learning some accounting.
Don’t worry, though, the basics are relatively easy. After you grasp the “basic concepts” learning your way around should be “relatively simple,” Gibbs says.
Learn for free. Unlike in the past, investors can find an accounting course without the need to dole out tons of cash. That’s because of the rise of online courses, such as one at the University of Virginia.
“Students don’t need financial resources, just time, and desire to learn,” says Luann Lynch, professor of accounting at Darden Graduate School of Business Administration in Charlottesville, Virginia. She made the five-week course for the 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 a certified public accountant when they are done, but they will know a lot of more than when they started.”
And that will include the ability to understand how financial accounts are made, what sort of decisions businesses make, and how to analyze what the financial statements mean.
“You have people in the workplace who haven’t had much exposure to financial information,” she says. “But when they look back [after the course] they see how it fits together.”
While the Darden course is free to take, people can upgrade for a nominal fee and get a certificate.
[See: 20 Questions to Ask a Financial Advisor.]
Likely roadblock. “It seems to me that most people think accounting is something you have to memorize,” Lynch says. As a result, it can be easy to get intimidated by the material.
But once you grasp the very basic ideas you should be able to use the concepts in multiple ways. Most importantly, you’ll be able to understand more about the investments you make.
“The trick is to realize that there is some fundamental logic,” Lynch says. “And if they get that logic they can apply that logic to many things.”
More from U.S. News
7 Great Ways to Invest in Cuba
11 Great Investing Tips for Women
12 Terms Every Investor Needs to Know
Why You Should Learn Accounting Now originally appeared on usnews.com
