Personal Wealth Management / Behavioral Finance
Timeless Investment Lessons for the Young—and Everyone
Successful investing doesn’t require cutting avocado toast from your budget!
As school years wrapped up this month, publications were busy churning out advice columns for college graduates who probably won’t read them. Allow me to toss my hat into that ring, but with a twist: advice applicable to both college graduates and investors. Here are four timeless and useful investing lessons whether you are beginning your career or close to wrapping it up!
Check Your Pride at the Door
College grads tend to be light on life experience but heavy on self-assurance of their own brilliance.[i] As they start their careers, though, new grads will struggle and make mistakes. Which is ok! Everyone stumbles and bumbles, regardless of age or tenure. These experiences remind us nobody is immune to goofs. Embracing humility will take you a lot further than sticking with bull-headed pride that prevents you from addressing your shortcomings.
It is the same in investing. Investors can quickly build pride if they make a couple of savvy trades or have a great year. It is easy to fall into the trap of equating some instances of success with broad investing brilliance. This overconfidence can lead investors to make decisions—like taking unnecessary risk—that aren’t aligned with reaching their long-term goals.
In order to build humility, consider what Fisher Investments Founder and Executive Chairman Ken Fisher argues in The Only Three Questions That Still Count: “Overconfidence stems directly from accumulating pride and shunning regret over time.”[ii] The solution? Flip it around: Shun pride and accumulate regret instead. Recall the trades that didn’t work out despite your conviction. Remember the years your portfolio didn’t do as well as the market. This will instill some humility and help you remember you could always be wrong. That can go a long way toward helping you stay disciplined when you start feeling overconfident about your investing abilities. Remember: Pride goes before a fall.
Embrace Your Mistakes
When life does end up making you look foolish, though, don’t flee from the experience—embrace it. This admittedly isn’t easy—few people care to admit being wrong. However, if you can swallow your pride, you may learn useful lessons.
College grads will make oodles of mistakes once they leave the hallowed campus grounds—a regrettable purchase, investment or decision.[iii] However, education doesn’t end once you graduate. These life lessons may or may not come cheap, but they provide real-world, experiential wisdom the Ivory Tower lacks.
Similarly, in investing, we won’t always make perfect portfolio decisions. Sometimes, our emotions can get the better of us. Scary news stories could make you panic and sell at the wrong time—a common behavioral error. If you make a mistake, don’t bury your head in the sand. Rather, find the learning opportunity. If cable news’s frightful financial analysis drove you out of markets during a past correction, that doesn’t mean you should avoid stocks because they are volatile. Instead, remember what media is designed to do: grab our attention by pumping scary possibilities and paying short shrift to more realistic probabilities. If you know bombastic financial media tempts you to make rash decisions, turn off the TV before your emotions get too hot. If you can do that, you learned from a past investing mistake—and you are a better investor for it.
You Are Probably Underestimating How Long “Long Term” Is
As college graduates prepare for a post-academic world, their perception of time may be a bit skewed. Many complete their studies in four years, which may feel like an eternity. In the grander scheme of a career, though, four years isn’t very long—especially since most college grads today can expect to work for four decades or more. When I started working at Fisher Investments after graduating college, I thought I would figure out my career plans within a year. Wrong. I vastly underestimated how long it takes to gain experience, knowledge and expertise—all of which I’m still building today and will have to keep building in the future.
Similarly, many investors underestimate their own investment time horizons—how long they need their assets to work for them. This will vary from individual to individual. Some folks require their portfolios to provide only for their daily needs for as long as they live. Others may want to leave something for kids, grandkids or a worthy organization. But these time horizons are likely longer than most appreciate, especially with average life expectancies continually rising. A time horizon doesn’t end when you hit a certain life event (e.g., retirement) or age. If you have a long time horizon, your assets should be invested in something that can deliver long-term growth. For many individuals, stocks are a vital component of a long-term strategy.
Believe in Magic
Finally, a PSA for both college grad and seasoned investor alike: Magic does exist. It is called compound interest, and legend has Albert Einstein referring to it as the eighth wonder of the world.[iv] For a simplified example, if you had a $1,000 portfolio that returned 10% in a year, you will have $1,100. If this portfolio returns 10% again the next year, you won’t have $1,200—you’ll have $1210. As your investment base grows larger, the same percentage increase results in a bigger gain.
For compounding to work, you need two ingredients: money to invest and time. The former means saving as much as you can and investing in a well-constructed strategy that targets your goals and needs.[v] For the recent college grad, once you get that first job, open an IRA and add a little something each month. If your employer offers a 401(k), contribute to it and take advantage of any employer match. Your greatest edge here is time. Saving $100 a month[vi] and investing it well could grow into something yuuuge over your lifetime, especially if you increase your savings once you start getting paid more.
Likewise, recent retirees can do something similar if they manage their cash flow and reduce expenses as much as possible. This is the reverse of socking money away early in your working life, and it allows more of your invested money to keep on working and compounding for you. While this isn’t revolutionary advice for either a college grad or investor, successful investing doesn’t have to be revolutionary—in some ways, boring can be better.
[ii] Source: Ken Fisher, The Only Three Questions That Still Count: Investing by Knowing What Others Don’t, pg. 75.
[iii] I speak from experience.
[iv] According to the Internet. So you know it’s true.
[v] Boring, I know, but that doesn’t make the advice any less important.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.
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