Investment Advice For My Children & Grandchildren

Okay, so I don’t have grandchildren yet, but I want to increase the odds you read beyond the title if you are old enough to have grandchildren. Should the investment advice we give to someone young truly be different from that given to someone old? And given where asset prices are, is it responsible to tell anyone to pile into the markets? Here are my thoughts on the topic, hopefully, applicable not just for my children:

Hedge fund manager Ray Dalio likes to say he chose the first stock he ever bought because it cost less than $5 a share, given that his savings from caddying at the time were, well, five bucks. That story is a great icebreaker but also highlights what’s wrong with our industry: when we think about investing, we immediately think about the stock market. Let’s take a step back.

My oldest recently returned back to college having completed a summer job. Thanks to our “Golden College Fund” (our kids’ college savings is in physical gold; please see this 2014 Forbes article for details), our son in the fortunate position that he doesn’t have to pay off college debt with his earnings. If he did, paying off college debt – like any other debt – is a choice of whether one expects a higher rate of return on one’s investments (after tax) than if one were to pay off the debt. It’s also a choice of risk tolerance, as a debt-free person has much less to worry about.

Talking about worrying: the advantage a college kid without debt over just about any other adult has is that he or she has no obligations, notably also no family to feed. I allege that financial stress is foremost a function of expenses, not income.As we grow older, we start piling on obligations: it starts with the indispensable mobile phone plan, might include that monthly car payment and possibly a mortgage. And if one is providing for a family, that too will take a good chunk out of the household income statement.

As such, for college students, life is comparatively simple. That said, it might be a worthy exercise for anyone in a more complex stage in their life to re-evaluate where they are. Most have “legacy” payments they make, but do you really still need that $80 a month cable TV subscription? Or, at the more expensive end of the spectrum, that vacation home that’s a money pit; should it be sold or possibly turned from an expense leader into a revenue center by making it available on Airbnb?

Have you ever noticed that if you go to a financial adviser, they’ll only recommend what they are licensed to recommend; or what their custodian can keep on their books? When it comes to investing, the first question you should ask yourself is not where to open a brokerage account, but what it is that you want to achieve. The brokerage account may merely be the means of achieving your goal.

Many say young investors can afford to invest more aggressively because they have more time to recover from market crashes; again, the emphasis is on stocks. I would like to phrase it differently: a young investor has a very high earnings potential relative to their current savings. Let’s say you make $50,000 coming out of college, with $5,000 in the bank. The way I like to look at it is that the $50,000 is a revenue stream you are getting from the investment you have made in yourself, one that’s likely to increase over time. It’s for that reason that you can be more aggressive with those $5,000. And that applies no matter what age you are: if you are an executive making hundreds of thousands, evaluate the odds of that income stream holding up, and put that into the context of your savings (which are hopefully higher at that stage in your life).