For most of their lives, my kids never wanted to talk about my work. But with one son two years out of college and another two years in, the issue of investment strategy has started coming up in family conversations, notes Rich Moroney, editor of Dow Theory Forecasts.
We suspect that few of you reading this are fresh out of college. But if you have children or grandchildren or nieces/nephews/friends just getting started in the stock market, here are a few tips to share with them.
1) Be patient. Investors in their 20s enjoy a massive advantage, the power of time. Legend holds that Albert Einstein, when asked about the most powerful force in the universe, responded, “Compound interest.”
As the chart below shows, a factor as simple as having 40 years or more to invest makes a huge difference to returns, potentially covering up a myriad of mistakes.
A simple $10,000 investment, augmented by an additional $10,000 investment at the end of each year and returning 8% annually would grow to $166,455 after 10 years, $504,229 after 20 years, and a whopping $2,807,810 after 40 years. A powerful argument for setting aside $10,000 per year, is it not?
2) Learn. In fact, the key here is to never stop learning. Even students who majored in business or finance have much to discover about how the market works. And for those who didn’t take finance courses, the mountain looms even higher.
Fortunately, twenty-somethings have time to climb that hill. Read The Wall Street Journal. Watch the stock market’s ebbs and flows. Take a course or two on investing. The more you know, the less chance you will make a fatal investing mistake.
3) Be humble. The pride issue particularly plagues those with business or finance degrees. No matter how much you think you know, you don’t know as much as you think. Stocks have a way of humbling the best and brightest, professionals with a wall full of degrees and decades of experience.
Nobody can consistently predict with precision how the market will react to the various forces that batter it, so be ready for surprises. Make decisions, but don’t dig in your heels when those decisions don’t work out. The best investors acknowledge when they make mistakes — and correct them.
4) Seek help. Unless you intend to become a stock expert, consider consulting someone who is. If you put in the effort to learn, the time to follow the market, and the sweat to perform your own analysis, more power to you. But few people choose that path. For the rest of you, newsletters like ours can help, providing broad advice on the market and even live-money portfolios you can follow.
5) Have fun. We’re talking about money here, but that doesn’t mean investing must become drudgery. Many of us got into this business because we enjoy riding the market’s currents. There’s something exciting about unearthing a quality stock, and I find nothing more satisfying than selling a stock at a profit just before the bottom falls out.
Some folks refer to investing as a game, a dangerous appellation in some ways because your financial future deserves a thoughtful, sober approach. Yet the give and take, win and loss, high and low of the stock market can play like a game for many of us. Take your investing seriously, but enjoy the journey.