This is the season when high school and college seniors don caps and gowns to mark an important milestone in their educations. These students furthered their knowledge and understanding in a range of subjects and fields, and I’d like to add to that knowledge base by sharing some insights about investing.
Indeed, if I had the opportunity to give a commencement speech on the topic, I’d offer up the following advice. Most of this is based on More Straight Talk on Investing, a recently published book I had the privilege of working on with former Vanguard CEO Jack Brennan. Here are my remarks, and I’ll follow the sage advice of Franklin Delano Roosevelt by being sincere, being brief, and being seated.
Congratulations, graduates, on your achievements. You’re about to turn the page to a new chapter—whether it be continuing your studies or starting your career. I’d like to focus on a practical life skill that will serve you well throughout your lifetime—how to invest your money. You can start today with the graduation gift checks you receive and, if you’re entering the workforce, your first paycheck.
If you do so, time will be your greatest ally. Let me use a case study to demonstrate the point. Suppose Will starts saving for retirement at age 22. He invests $10,000 a year for 10 years, earning an 8% annual return. He then stops making contributions. His classmate Conor waits until age 32 to begin saving for retirement, contributing $10,000 each year for the next 30 years and earning the same 8% return.
Who has more money at age 62 when they’re ready to retire? The answer is Will. His $100,000 in contributions grew to $1.6 million, whereas Conor’s $300,000 in contributions reached $1.2 million. Conor invested $200,000 more and ended up with $400,000 less!*
The power of time and compounding is extraordinary. As Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t, pays it.” (What commencement speech is complete without a pithy quote or two?)
A simple way to build wealth over time is to invest on a regular basis. If you join your company retirement plan, you’ll do this automatically through regular payroll deductions. You can also establish your own automatic investment program by setting up a Roth IRA, investing in the mutual funds or ETFs of your choice, and establishing regular electronic transfers from your bank account. If you invested roughly $115 every week, you’d hit this year’s maximum contribution limit of $6,000.
In addition to ensuring you save consistently, automatic investing lets you take advantage of dollar-cost averaging (DCA). With DCA you can lower your average share price by buying an investment at different times, as prices rise and fall. DCA only works if you stick to it through good markets and bad. It doesn’t protect you from loss in a falling market nor guarantee profit, but it is a prudent and practical approach to investing.
Balance will serve you well in life and in investing. Balance means owning different types of investments—U.S. and international stocks, U.S. and international bonds, and money market instruments. With balance you’ll reduce risk, as the asset classes typically don’t rise and fall at the same time. For example, in any given year, bonds may produce positive returns that help offset the losses from stocks.
Diversification is also important to a sound portfolio. Diversification means spreading your money across the stocks and bonds of different companies, different sectors, and different countries. The ideal vehicles to achieve diversification are broad-based mutual funds and ETFs, which considerably lessen the risk that an individual security or sector will hurt your portfolio. In simple terms, it’s not “putting all of your eggs in one basket.” You can choose to assemble your own portfolio of funds or purchase a single-fund solution, such as a balanced fund or target-date fund.
Once you’ve established your investment program, you need the discipline to hold fast over the long term. You’ll face a bumpy road of stock market volatility and a bear market or 3. You’ll face the temptation of hot-performing stocks and sectors. You’ll face the siren songs of new, get-rich-overnight products and asset classes. Tune out all that noise. Keeping an even emotional keel will give you the resolve and perspective to stay the course.
All investments have costs, including product expenses and taxes. Keeping your costs low provides the opportunity to keep more money growing in your account on your behalf. Sheltering your money in tax-advantaged accounts, such as 401(k) plans and IRAs, allows your savings to compound tax-free. There’s an old Wall Street maxim: Buy low and sell high. I’d advise you to keep your costs low and your savings rate high.
A final word of advice: Live below your means. You simply can’t achieve long-term investment success if you spend more than you earn.
What I offered you here today are only sound bites from More Straight Talk on Investing. I encourage you to read the full volume and continue learning about investing. As Benjamin Franklin said, “An investment in knowledge pays the best interest.”
Thank you and good luck.
*This is a hypothetical scenario for illustrative purposes only. The average annual return is not guaranteed and does not reflect actual investment results.
All investing is subject to risk, including the possible loss of the money you invest.
There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Diversification does not ensure a profit or protect against a loss.
Dollar-cost averaging does not guarantee that your investments will make a profit, nor does it protect you against losses when stock or bond prices are falling. You should consider whether you would be willing to continue investing during a long downturn in the market, because dollar-cost averaging involves making continuous investments regardless of fluctuating price levels.
Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.
Investments in stocks or bonds issued by non-U.S. companies are subject to risks, including country/regional risk and currency risk.