Sunday, September 13, 2009

How to identify the level you're at as an investor.

The Investor Pyramid would work to classify individuals into a category to enable them to see the areas they need to improve and focus upon. At the bottom, the base of the pyramid, it would be the beginners and on the tip of the pyramid, the advanced investors. The bulk of the population falls onto the bottom category of the pyramid. Only a small minority of the population would fall into the pointy end category.

1. Beginners & novices
(Majority of the population falls into this category)

*How to identify if you belong in this category:
Debts, loans and borrowings on consumer products (TV, cars, watches, furniture, holidays etc), credit card debt balances that never gets paid off, no savings, no emergency funds, no idea about what you spend or what you earn, constantly late on bills (rent/mortgage/phone/electricity/gas/insurance etc), incur overdue fees and penalties either occasionally or frequently, incur bank charges for insufficient funds, cheques bouncing, living day to day on a financial treadmill and if you were to lose your job, everything would collapse.
*Topics for you to learn and identify with:
Budgeting, saving money, cutting costs, spending less, simplifying your expenses, frugality, recycling, reusing, snowballing your debt repayments and the basics of money management.

2. Intermediates and just fumbling along

*How to identify if you belong in this category:
Your bills are paid on time, you have some savings (you're not too sure how but somehow you managed to spend less than you earn), you know you've got to find a financial advisor or else invest in something but you've got no idea where to start, you don't really know anything, you have a mortgage that you're paying off but it's taking forever to pay off and you feel trapped financially.
* Topics for you to learn and identify with:
Budgeting, saving more money faster, the basics of
investing in shares and property, the financial/economic terminologies, escalating your mortgage repayments, the tips and tricks of debts, learning about income statements, balance sheets.

3. Above average Investors

* How to identify if you belong in this category:
Your bills are paid on time, you know how much you save and spend either daily/weekly/monthly/annually (ie: your budget is in top shape), your mortgage is on its way to being paid off early, you've got some shares and/or some managed funds and/or investment properties, you have a balance sheet of all assets and liabilities.
* Topics for you to learn:
How to invest in shares and property, how to analyse and compare returns, how to negotiate and organise your finances, how to find the best deals for investing and for financing, diversifying your investments, insuring yourself for income protection, disability, disablement, retirement planning, superannuation, Self Managed Super Funds and wills.

4. Advanced Investors (Minority of the population falls into this category)

* How to identify if you belong in this category:
Your budget is meticulous and you already have a good idea of what your income and expenses are. You've got investment properties and/or extensive share portfolio (direct/indirect), investments, funds and savings, your will is set up, you know what your balance sheet would be - infact you've applied for a lot of investment loans so you clearly know what you're assets and liabilities balances are.
* Topics for you to learn:
How to analyse yields, returns, investments, assets, tax, insurance protection (if you haven't insured yourself), gearing, using leverage. If you fall into this category then you pretty much won't be perusing the internet for blogs like mine (because you already know it all) and you'd be spending more time on stock exchange sites and time with your investments to monitor them, retirement planning, superannuation and Self Managed Super Funds.

Well folks, that's pretty much my reverse pyramid of investor categories by ability and actual assets/experience. There are more extensive breakdowns of these categories, but an important point to note is that it's useless for a person from category 1 (the beginner) to jump straight into category 4 (the experienced investor) jumping categories like are opening yourself up to financial problems, liquidity problems, debt problems, banks and loan sharks taking advantage of you and also you can fall prey to the swindlers.

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