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The First Question You Should Ask Of Any Investment

“It’s a language that was created … to kind of separate the banks and the institutions from the people, so they wouldn’t really understand. It makes people feel stupid. It’s easy to not understand.”

– Steven Carrell

The use of complex financial jargon, when it is not needed, appears to be a common occurrence – and that is unfortunate.

As actor Steve Carrell expressed above, the use of jargon can become an impediment for regular people to understand the world of finance. The strange thing, though, is that some stock market participants might not stop to ask the meaning of the complex words he or she is hearing.

That should not be the case.

Inside the use of jargon      

Famed financial journalist and author Jason Zweig was in an interview recently with Quartz and explained the strange phenomenon of the use of financial jargon:

“If you think about when you go to your doctor. Something’s wrong. You get a diagnosis. Your doctor tells you that what you have wrong with you is this thing. And it’s like three words and each word has seven syllables and some are Greek and some are Latin and none of them you really understand. You just know it’s probably bad. So you stop your doctor and probably say, “Well, what does that mean?”

You immediately want to know in plain English what the doctor just said.

But if you’re dealing with someone in the financial industry who throws jargon at you, there’s a very powerful temptation to pretend you understand what the person means, even when you don’t.

Because it gives you some comfort that you understand what’s happening. And it makes you feel like a little bit of an insider.”

Zweig feels that the use of jargon in the financial industry is unlike its use in science; financial jargon is often not precise and may be used to complicate ideas which are otherwise simple. Sometimes, jargon can be even used to obscure something scary.

So, in taking a cue from Zweig, we may want to ask ourselves one main question whenever we invest: “Do I understand my investments?

Peter Lynch, a celebrated fund manager, once said that we should invest in companies that we can explain with a crayon. Lynch makes a good point here.

If our understanding of the companies in our own stock portfolio is fleeting at best, we may be spooked out when the inevitable downturn in the stock market occurs, and thus miss out on the subsequent recovery. Furthermore, we may not make the right decisions if we do not understand what we are investing in in the first place.

Asking questions, and understanding our own investments, is the key first-step we should take before we put any of our hard-earned money to use in investing.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.