My Advice for the Young Investor: What I Wish I Knew Then

Posted by Brad McMillan

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March 31, 2015 at 10:00 AM

advice for the young investorThere's been a lot of media attention placed on younger generations (Gen X and Y) and their potential to help advisors grow their businesses. Still, many advisors remain reluctant to tap into this market, despite the knowledge and expertise they have to share.

But as I think about myself 20 or so years ago, there are many things I wish some trusted advisor had told me! Don't you? To that end, here's my advice for the young investor—and perhaps some food for thought for those of you considering this next generation of clients.

Think Ahead

Thinking things through ahead of time can be difficult, to be sure, but it often pays off in the end. I took risks investing in the tech bubble, knowing full well that valuations were ridiculous. But I was convinced I would know when to get out. There were two problems with my thinking:

  1. I hadn't defined the timing of "when to get out": down 10 percent? 20 percent? 50 percent?
  2. When the time actually came to pull the trigger, I was paralyzed by the decline that had already occurred. I held on far longer than I should have, hoping (in this context, a bad word) that values would come back.

The lesson I took away from this experience is to define when you will get out—and get back in. The time to fix the roof is before it rains. That is to say, the time to decide what you will do with your investments when the market falls is before it actually does.

Greed and Fear Will Destroy You . . . if You Let Them

Looking back, whenever I found myself hanging on, trying for the last little bit of return, I ended up losing most of my gain. Similarly, when I ran scared, just wanting to get out, I ended up selling at the bottom. For me, gold—which I have owned for years—is a good example of this tug-of-war. When it was going up, I was tempted to buy more. When it dropped, I was tempted to sell. Recently, I have been more thoughtful and done neither, but the temptation remains!

When you want to take more risk (because the market is up) or less risk (because the market is down), you are giving in to these two demons—and you will probably suffer for it.

Create investment buckets. One way to manage both greed and fear is to assign investments to specific objectives. This can help you focus on meeting your goals, which, after all, is why you're investing in the first place. By assigning different pools of capital to different goals, using different portfolios, you can explicitly match the risk of each bucket with the time frame of the goal.

For example, I have a cash emergency fund that covers several months of living expenses. Having this fund makes it easier to invest my son's college account (with a 15-year horizon) on a riskier basis and my retirement assets (with a 25-year horizon) on an even riskier basis. Knowing that my shorter-term needs are met frees me psychologically to accept the greater risk in the longer-term portfolios.

Losses: The Real Measure of Risk

Risk is commonly measured by how much returns vary over time. Unfortunately, this doesn't work for me. I see risk in drawdowns: how much have I lost from the peak? When I make money, I figure it is mine—so any losses hurt. It doesn't work that way, of course, and I wish I had been more aware of this in the beginning. So, my advice for the young investor is this: knowing the shot will hurt may not make it any more pleasant, but at least you are prepared.

Learn from My Mistakes

In reviewing some of the mistakes I've made, I do wish some trusted advisor had better prepared me to cope with the weaknesses we all share when it comes to investing. Failing to plan, emotional decision making, and failing to design my investments to help meet specific objectives have cost me quite a bit of money over the years. The more you can help your next generation of clients avoid these mistakes, the better off they—and you—will be.

For additional insight on the markets and economy, and how they may influence the guidance you provide to your clients, be sure to check out my blog, The Independent Market Observer.

Do you have any additional advice for the young investor? Do you consider this group to be a viable market for your business? Share your thoughts with us below.

How to Address the Human Vs. Financial Capital Dynamic with Younger Investors

Topics: Asset Management & Investing

    
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