Dear Young Investor

I know most you aren’t, so please feel free to pass this on to the younger crowd.

Whether you're just starting your investing journey or haven't taken the first step yet, know this: an early start is the single most important thing you can do.

Investing today is more overwhelming than when I started decades ago, back when "Money for Nothing" topped the charts. Ironically, that mantra — money for no work — is more inescapable than ever. Today, an entire industry is built by the clever (devious?) to capture and profit on your attention and hard-earned money. Influencers and algorithms broadcast their "incomes" and portfolios from every digital rooftop, and an entire industry now profits off capturing your attention and your money. Crypto, meme stocks, 24/7 sports betting, and prediction markets have become the biggest obstacle to building real wealth for younger investors.

It's human nature to want in on these newer, shinier alternatives. That's fine but this speculative bucket should amount to no more than 10% of your investing funds, and you should be prepared to lose all of this speculative capital if things head south. Also, when you have that speculative itch, run it through this filter first:

The good news is there’s a proven, easy to follow alternative approach to this new world of confusion, noise and get rich now schemes. Invest for the long game by following a process of simplicity, diversification and patience.

The ingredients for building wealth haven't changed since I started — even though the number of ways to get distracted from them has exploded. One of the greatest ways to avoid trouble and build wealth is to keep it simple. Low-cost ETFs and mutual funds with sustainable track records remain the best foundation. 

You could add individual stocks (cap it at 20% of total investment capital), favoring companies with proven business models and strong future earnings power. Yes, stocks are more volatile, but you have decades to ride out the volatility and capture this growth.

Diversification is survival insurance. A well-diversified portfolio is the closest thing to a free lunch in investing. Concentrated investors and speculators get wiped out by one bad decision; diversified investors live to compound another day.

Here's the catch: if you're diversifying correctly, you'll always own something you don't like — something lagging that makes you want to sell, especially while those braggadocious “investors” boast about going all in on the winners. That discomfort is the price of admission. A good portfolio isn't a collection of things doing well today — it's preparation for a future nobody can predict. You don't diversify to get rich overnight; you diversify so you survive long enough to get rich eventually. 

                                           "If you want the rainbow, you gotta put up with the rain." - Dolly Parton

Time in the market beats timing the market. Despite what those charlatan speculators are claiming, the fact is the longer you stay invested, the higher your odds of walking away with a gain. The world is full of foolish speculators, and they will not outdo the patient investor.

It continues to pay to be optimistic when investing. Long-term returns are the only ones that matter and the longer you invest, the higher your odds of walking away with a gain as shown below:

                                                  Stock Market Gain By Holding Period (S&P 500, 1950 thru 2024)

                                                                                               Source: Returns 2.0

Finally, in your long investing career you will face recessions, elections, war etc. These scary headlines combined with media muppet pundits will try to get you to freak out and sell. However, given a proper and sustainable investment plan and the following index card (keep it handy!), you will have the intestinal fortitude to ride out the stock market’s inevitable declines and avoid making disastrous, short-sighted investment decisions.

What you’ve done is not as important as how long you’ve done it for. So, be curious, patient and keep moving forward with investing especially when the going gets tough. Believe me that your future self will thank you for the choices and actions you make today about investing and yourself.  

Keep looking forward and enjoy all the bright promise of an investing career.

David Hone, CFA