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Investor, Educate Thyself



Remember when all your friends were talking about real estate? Well, now they're obsessed with stocks. The boomers, pushing into middle age, have woken up to the prospect of growing old. So they're saving for it the newfangled way: investing in the stock market through 401(k)s and mutual funds. Virtually all personal savings in 1995's first quarter went into equities. With the market up almost 60% in the past 19 months, everyone looks like a genius. But what if the market tanks? In this era of people's capitalism, can the people manage risk for the long term, or will the love affair with equities end in a speculative frenzy, dashed retirement dreams, and angry political accusations?

We know a few things. The huge inflow of cash into stocks is great for economic growth. As stocks rise, the cost of capital declines for companies. Some $19 billion of investor money has poured into initial public offerings so far this year, making Yahoo! and other startups possible. We know, too, that the wealth effect for households holding stocks is contributing to higher consumer spending.

What we don't know is whether or not people have the skills to manage the risk of their new equity ownership. So we have some advice for them. No, not plastics, but diversification and education. No one investment instrument ever shoots the moon. Invest in various assets. And spend more time learning about investments. The quality of information varies tremendously. Corporations must educate employees on managing risk. Stock ownership is a high-octane fuel that can propel both economic growth and individual wealth. But we must learn how to manage the new risks in using it.

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