The investment industry has neglected young people.
The reason is simple and obvious. They do not have enough money to generate big fees. If the advisor provides an honest product at an honest fee, the maintenance and compliance costs leave no profit. If the advisor sells something with a big commission, it is nearly always inappropriate.
A confluence of events has grabbed my attention.
- It is graduation season – with plenty of news from all fronts.
- My son graduated, with an excellent honors thesis and a new job in his chosen profession. Part of me wishes he would continue to work with me, where he always made an excellent contribution. But I am proud that he is an independent thinker and has a good focus on his career.
- I have had many inquiries from young people, who are wisely interested in planning for the future.
I started on this idea a couple of weeks ago. Like many OldProf ideas it represents a good concept but quickly threatens to spin out of control. I have decided to write something now, during graduation season, but keep the theme open for comments and suggestions.
I am starting by assembling some hot topics. I invite comments both on the choices and also what I have left out.
Your Graduation Speaker
Your commencement speaker was probably boring and predictable. There is a general outline followed by most. There are few exceptions. If your experience did not include inspiration, it is easy to rectify that problem. These are mostly timeless, so the best efforts from history still work today. Here are some good sources:
From VOX. Try Steve Jobs, or Conan, or JFK or plenty of others. This is a highlight reel.
From CNBC. Michael Lewis's prof told him not to try to make a living from writing!
Your College Decision
Ignore the satire. A college degree remains a great investment.
You earn twice as much with a college degree. (NYT)
A Master's Degree has an even bigger payoff, but maybe not a PhD. (Pew Research)
Your Personal Finances
There is a lot of great personal finance advice. You should quickly learn the following:
- How to budget and track your expenses;
- Understanding the power of starting early;
- How to set aside funds for unusual but predictable expenses;
- How to save – which means living within your means;
- How to invest, beginning with maximizing any employer benefits you get and then deploying other savings; and finally
- Keeping records of everything – since that will maintain your focus.
Good starter advice here.
I know and understand the leading advice for young people: Find a couple of good mutual funds. Set aside money each month and dollar cost average your purchases.
There is absolutely nothing wrong with this advice. Do it if you can.
For many young people it would be more interesting and educational to hold some individual stocks. My guess is that the short-term results would be similar and the long-term results might be better. Why? There is nothing like following your actual decisions to focus your attention. Two warnings:
- You will want to buy companies that you know – and you should. A great company is not necessarily a great investment. Study the financials before you decide you want to buy. Do you wish to own the business at the current price? That is the key hurdle for the new investor, and there is no shortcut to learning it.
- Do not overtrade. Find investments that have long-term potential and do not try to time the overall market.
Your Future and Your Role as Citizen
Your parents and grandparents have done some good things. I believe that a child born today faces better prospects than one born at the time of my own son. He enjoyed better prospects than someone born twenty years earlier.
If you live in the US or some other advanced economy, you have already won a lottery. One of the issues you face is demographic. There are fewer workers and more claimants on benefits. This is a long-term economic problem for the US, and it may well be worse in other countries.
If I were a young person I would be clamoring for reform and impatient with extreme partisans that blocked solutions. You should read about and study these issues.
Here is a simple and powerful introduction from Internet analyst Mary Meeker via Joe Weisenthal:
Having said this, you should not let your strong political views interfere with your investment decisions. That was a mistake made by your parents and grandparents. You can do better.
This will seem strange. You must not be afraid to fail. This means several things:
- Taking risks. There will never be a better time.
- Recognizing opportunity costs. I wish I could avoid the economic lingo, but it means realizing what you could have done with your time instead of what you chose.
- Getting out of a bad job. When you realize that something is not going to work, you should stop. Right away! Do not worry about appearances. If your immediate sense shows a warning, you are probably right.
- Failing "fast" is OK. Others may look at your decision as a failure, but it is still wise. I quit a few jobs after a short period of work and I should actually have done it more often.
- Parents and grandparents might consider helping this along. For some, it could be buying a book. For others, maybe a brokerage accounts with a starter position in some shares. Just a thoughtJ
Megan McArdle's The Upside of Down. I read and enjoyed the book and have sent gift copies, but I have not yet written my review. Young people should read it. It is replete with riveting anecdotes and the personal lessons are excellent.
I have just finished reading Think Like a Freak, a gift from my son. Chapter 9 reinforces the McArdle theme. The entire book is great.
Tom Brakke's Letters to a Young Analyst. We have both gotten questions from those wanting a career in finance. I am honored that Tom included my contribution, and I think the advice is relevant for a much wider audience.
Something from Warren Buffett. Much of it is free online. Young people should pretend that the old guys know something that might be relevant!