No, I don’t have any grandchildren.
This was a piece published on AAII by Charles Ellis.
I don’t agree with it 100%, but there is a lot of meat in the letter to share around and to put up for discussion.
If you don’t have an AAII subscription, here’s the full pdf version.
If you have grandchildren or children of your own, print a copy, put it in an envelope and let them read it when they are ready.
The 12 Investment Guidelines
Here are my thoughts on each guideline to add to the letter.
#1: Always invest for the long term.
Even if you start investing at 40, you still have 30+ years of investing left. Fixating and chasing one year returns will get you no where.
You also have remember that even after you’ve retired, you have at least another 20-30+ years of investing to do. Just because you’ve retired, it doesn’t mean you will withdraw all your money. It’s never too late to invest for the long term.
#2: Diversify widely
The author is a big proponent of spreading your bets. He uses the main argument that it’s not possible for someone to know which stock will do better than another.
The whole diversification topic is always up in the air.
Honestly, it works to concentrate and it also works to diversify.
Just find the method that works for you.
#3: Ignore day to day price gyrations
Ignore day to day, week to week price movements and news reports.
Mr. Market is there to serve you, not to guide you. – Warren Buffett
Stock prices going down is actually good news because it lets you buy more for the same dollar amount.
Had you retired in 2008 at the peak of the recession, by ignoring price and focusing on value, your retirement account would have received a huge boost from the recovery if you stuck to buying when everyone is fleeing.
#4: Minimize trading to reduce fees and taxes
Wise advice. It’s amazing to see the fees rack up for day traders.
On Wall Street and among the funds, activity is achievement.
Don’t mistake activity with achievement – John Wooden
It makes them look like they know what they are doing. Minimizing activity is seen as foolish because we are so used to being busy busy busy.
#5: Consider low-cost indexing
Warren Buffett has also said that for most investors, an index fund or ETF is the best choice.
Since this letter was written to the author’s grandchildren (all less than 10 years of age at the time of writing) it’s good advice.
#6: Beware of fees
1% fees doesn’t sound like much until you put it into context.
This is 1% of your assets annually.
If you have $100k invested into some fund or it is being managed professionally, you lose $1k.
That 1% also affects your returns as 1% of assets is closer to 15% of returns. Think of the compounding you can miss out on.
#7: Understanding investment history is certainly the best way to understand how best to invest
Learning about history is the best way to learn about the future. As I wrote last week, history repeats itself.
In the business world, the rearview mirror is always clearer than the windshield. – Warren Buffett
#8: Active managers cannot beat the market
The authors focus on index funds. The under-performance of fund managers is repeated a few times. This point in particular generalizes it a bit too much because if you look hard enough, you can find lots of smaller managers doing very well against the market.
The objective of beating the market is never a good one, so finding an investment manager focused on long term returns with a solid investment process will take you a long way.
#9: It is important to know yourself first
If you want the hottest stock in the market, you’ll be frustrated if someone managing your money is buying KO and vice versa.
What investment style and program best suits you?
You have a particular style and method that they feel comfortable and safe with. Choose the manager most compatible with your investing philosophy.
#10: Most investors make 3 classic mistakes
- Trying to beat the market
- Borrowing on margin to really beat the market (but leverage works both ways)
- Buying high and selling low because too much focus was put on short term price and market movements
#11: See the big picture
Instead of just focusing all of your investments into a brokerage account, think about other ways you can allocate and earn capital.
If you roll over a lot of credit card debt or other high interest accounts, paying it off is the equivalent of making the same type of return.
e.g. Paying off a $5,000 loan accruing 10% interest is the equivalent of achieving 10% on a $5,000 investment.
#12: Time and Saving is always the first step toward investing
The stock market isn’t a casino to strike it rich in one play.
Let time and compounding work to make money work for you and build wealth. Don’t fall into chasing riches.
In the past 2 months, there has been a sudden spurt among my friends aged between 25-35 getting into the stock market for the first time and dumping 100% of their “investment” money into IPO’s and chasing big one day returns without knowing a thing.
Wise Investment Guidelines
True advice doesn’t change much throughout the years.
You’ve definitely heard and read this before from a variety of sources. It’s nothing new, because it’s true.
A great letter to leave for your loved young ones.