FREE NEWSLETTER
Go to main Forum page »
Readers’ responses to an earlier post on volunteering to teach a module on investing in index funds and ETFs to high school students electing to take a new personal finance course were very helpful (and brutally honest!), Consistent with those suggestions, the “text” will be Bogle’s deceptively simple, The Little Book of Common Sense Investing. Evans and Malkiel’s The Index Fund Solution: A Step-By-Step Investor’s Guide is the workbook. What follows will probably be the first overnight reading assignment aimed at defusing some of the reservations teenagers night have about investing in the market.
If you don’t know who you are,
this is an expensive place to find out.
Adam Smith, The Money Game
If you can’t control your emotions,
being in the market is like walking
into a heated area wearing a backpack
full of explosives.
Charles D. Ellis, Winning the Loser’s Game
Valencia Can’t Chill Out
This whole stock market thing is worse than a scam. My mom lost half her money in Apple stock a long time ago (note: Apple lost over 50% in 2008). If it happened to Apple it could happen to anything. She says the stock market is just a casino for rich people. I’m getting the heebie-jeebies just talking about it.
Steve’s response:
Believe me, I know what you mean. Even after sixty years of stock investing, I still get anxious when I hit the “buy” button. Not to get a little antsy when putting your money at risk is a fool’s paradise. Just imagine the fate of people who got slammed by the tech stock collapse of 2001, the mortgage default debacle of 2008 or the 2022 beating brought on by the aftermath of the COVID pandemic. But if they hunkered down and persevered through those bear markets, they enjoyed the monstrous recoveries.
Take your mom’s disastrous experience. But in 2009, just one year later, Apple soared 132%! That’s the Achilles heel of short-term investing, when the market is a roulette wheel and nothing more than a game of chance. Since the market tends to ratchet higher over time, consistent profits are more likely the longer you stay invested. Time in the market is much more important than timing the market. Much research has shown that the investor who stays the course is likely to earn a profit over 80% of the time in ten years and 90% in twenty.
Michael’s No Quant, That’s For Sure
Okay, I get that. But I’m not a math whiz. Numbers are my biggest fault. And I get confused by all those graphs. The squiggles that run across the page look like my dad’s cardiogram. I got a C on my math midterm, but my parents want me to bring it up to a B on the final and the course. I just don’t know. The last thing I need to deal with now is the stock market.
Steve’s response:
I hear you Michael. And yes, math jocks often do have a leg up on the market, but not always. To be sure, the popular quantitative approach might evaluate the desirability of a stock by looking at the ratio of its market price to the company’s earnings. Fundamentalists tend to examine a stock from the “bottom up,” focusing on what the price of the stock should be based on a consideration of statistical measures of the company’s financial health and earnings potential. Technical analysis, on the other hand, uses features of the trend of a stock’s recent price to predict its performance. You might say that analysts who practice the fundamental method give you the “what” to invest in, whereas market technicians tell you the “when” to do it.
A more qualitative perspective, which entails less math, is more likely to take in the whole picture, like the strength of the economy or the financial well-being of the consumer. Qualitative thinkers might anticipate the fallout from the proliferation of artificial intelligence, like the displacement of writers and artists. The qualitative investor may also try to anticipate the possible influence of emerging demographic trends on stock prices, such as the impact of the aging world population on the earnings of pharmaceutical companies. Even more, the qualitative approach ushered in the era of healthy lifestyles and sustainable products.
Farah Fears She’s Missing Out
My mom bought some stocks one-by-one and they bounced around and drove her crazy. She knew about investing in stock funds but warned me they go up slow. If I’m putting in the time, I don’t want to wait forever to see results. I know crypto will get me some action, but my dad says it’s a crapshoot. He calls me the world’s greatest FOMO, a girl who always fears she’s missing out.
Steve’s response:
Playing the market can be challenging and fun, but in the short-run, it’s akin to gambling. Investing for the long-term to meet financial goals like paying for postgraduate study is a serious business. Done with knowledge and patience, you will usually make at least twice of what you could make in a safer but far less rewarding savings account. It may be too late to start investing for college now, but what about your retirement? Will it be Madrid or a part-time job?
Isaiah Works Off the Money Blues
Where am I supposed to get all of this money to invest? My mom is a bank teller and my dad is a bus driver. They are able to see me through a state school, but with two college-bound sisters I would be on my own after graduating. I’m a barista at Temple Coffee every Sunday and looking forward to upgrading my ski equipment. Count me in for working part-time in college because I have big plans for my retirement. I want a chalet in the Swiss Alps and the chance to ski the world’s most challenging slopes. But Uncle Al says you need money to make money and right now I don’t have any.
Steve’s response:
Isaiah, you should be commended for your enterprising spirit. But wow, those are some awesome and expensive plans. In truth, you don’t need s lot of money to make money for your retirement. Almost 18, you definitely have time on your side. You can start with a very small initial investment (like $100) and then a whole lot of diligence and frugality. By that I mean a commitment to save and invest methodically and a willingness to forego some of our society’s temptations like a fashionable wardrobe for freshman year.
Here’s how the game plan would go. Skim $100 from your wages at Temple and plunk it into a stock fund. Then, systematically make monthly contributions of $60 to your account until you reach the consensual retirement age of 65. Assuming stocks continue to grow at the same 10.5% annual rate they have maintained over the last one-hundred years, you will have built a tidy nest egg of one million dollars. Careful down those slopes, Isaiah.. Could be a rich man someday.
Must Lisa Compromise Her Personal Values to Invest?
Hold on. I feel I’m being forced into something I’m not interested in, not interested at all. Painting and playing piano are my thing. I read a lot about them, go to every concert I can afford and visit art exhibits. What’s with this focus on money, anyway? My parents have taught me not to let it become too important and dominate my life. Money can’t make you happy. And where would room be for spirituality? My religion has taught me to live a balanced life of family, friends and meaningful work. I don’t really see a place for money in that. Count me out.
Steve’s response:
So glad someone brought up spirituality before we have to close. Making money need not and should not banish spirituality from your life. This is a sensitive and complicated topic because the various religions teach different views about making money.
I have found it helpful to think of investing in this way. For sure, money can’t make you happy by itself. But devoting a bit of time to plan for your family’s financial future may ultimately allow you more freedom to enjoy favorite activities and passions as an adult. Lisa, given your interests, having a modest stash might enable a season’s ticket to a local concert hall or even a visit to Europe’s fabled art museums when you retire.
A Final Thought
All of us have to make peace with the role of investing in our lives. Setting your moral compass for making money will be a foremost task of your young adulthood.
Thanks for joining me.
