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Investing 101 for young investors

May 14, 2020 | Thomas Smith


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My sons have been asking questions about investing, and timing of deploying new cash. What follows is a summary of my thoughts as I have communicated to my young adult sons.

Father and Son playing basketball in driveway

We are in week 7 of our coronavirus lockdown.  It is easy to bemoan the social distancing, shutdowns, closed schools, and work from home mandates.

I have discovered that I have a really fun family.  As the steady drumbeat of this pandemic continues, I hear and read stories of parents struggling with the curriculum of online education; of families fatigued by too much “togetherness”; of kids complaining of boredom; and of inadequate WIFI bandwidth.

While I too have been inconvenienced, I am candidly quite content with this status. Don’t be a hater. Please don’t pile on. I realize that I am probably in the minority, but for Pam and I, this has been “Christmas in Spring”…shelter in place style. We are fortunate that the pandemic hit during this station in our lives. I don’t know how we would have coped with 4 elementary aged boys. I sympathize for those families! With sons aged 23, 21, 19, and 17….Pam and I are having a blast! Our oldest works for a big 4 accounting firm out of Dallas, and since his office is closed, he has decided to come back to Tyler to work remotely.  We have two college sons, who have come back to Tyler and are completing their studies remotely.  Finally we have a high school Junior who is completing his high school work remotely, and is delighted to have his big brothers unexpectedly back in town. 

Our biggest struggle is the balance of allowing them space to enjoy college and adult life, while recognizing that this is not a pandemic frat house. We do have a schedule to maintain, which includes, 6:30 pm dinner, and “quiet time” during the school and work day for those of us working remotely. Like most families, we have limited outside visitors and friends. However, a couple of the boys have girlfriends, who have made the cut, and allowed access to the inner sanctum.  

Our activities include rousing games of Catan, Yahtzee, Rook, Risk, Spades, and Balderdash.  We have ploughed through a variety of puzzles, have binge watched Longmire; and Pam and I are now familiar with a variety of Hip Hop artists of whom we would never have listened to …but for a pandemic. 

As I mentioned, my oldest son, is employed and now has money of his own. While my second son, is a college Junior, and a Marine Reservist. Both have discretionary income, and since we are all working remotely from our home, they have access to me during the work day.  They both began investing over a year ago, and have seen their modest portfolios rise and fall over the past year.  As a result, they have become more interested in the Stock Market over the last two months.  Recently, they have been asking me more questions about investing, and the timing of deploying new money.  What follows is a summary of my investment thoughts as I have communicated to my young adult sons. 

  1. Given the market fall, and uncertainty, Is this a good time to invest?  Many believe this is a “once-in-a-generation” opportunity to buy into the stock market, particularly into the most hard hit stocks.
     
  2. As more bad news materializes, why is the stock market moving back up? Many professional analysts are indicating that the market has already priced all of the bad news, and that the market is now reacting to the recovery that is forthcoming. However, some analysts believe that this is not the case, and that we will re-test those stock prices that we saw in mid March. Those analysts call this a “false bump”, meaning that this uptick is a false indicator of the true health of our economy. So, this is either a recovery, or a false bump….we will just have to wait and see. 
     
  3. As a young investor, is my portfolio any different from your portfolio Dad?  It most likely is very different. As a young investor, you have time to absorb the rise and fall of the Stock Market over a period of many decades, and if the future is any indication of the past, you will likely realize a healthy double digit return on your commitment to Stocks over a 30 to 50 year period of time. Therefore you can afford to take on more risk (in the form of Stocks), than an older investor in their 50’s, 60’s or 70’s who might not have as much time to recover from market declines. For example: an investor aged 23 might deploy 80, 90, or even 100% of their investable assets into Stocks, while an investor aged 60 might only deploy 40, 50, or 60% into Stocks.  
     
  4. If I don’t invest in Stocks, where do I invest?  You might want to consider balancing your Stock investment with a dose of Bonds. A “Bond” is another word for debt.  So when you buy a bond, you are essentially loaning someone money. Bonds come in many varieties, including but not limited to Government (US savings bonds), Municipal (Independent School Districts), Mortgage (FNMA, GNMA), Corporate, and Treasury (US Treasury Bills). These categories can be subdivided even further, and is beyond the scope of this summary. Bonds are generally not as volatile (risky) as an investment in Stocks, and generally have a lower expected return profile over a long period of time. Therefore they are a good way to balance your Stock portfolio with a decent return and lower risk. 
     
  5. If Bonds are safer, can you still lose money in bonds?  Yes indeed. Once an investor has made a fundamental decision to “invest” rather than “save”, the principal is subject to market loss and declines. This includes Bonds and Stocks. Bond prices react to the general movement of interest rates. As interest rates rise, bond prices fall; and as interest rates fall, bond prices generally rise. This is one of the ways that one can “lose” money in bonds. When the originator of the bond, has financial challenges, their bond price falls. This can lead to default, which is another way bond investors can lose money. Finally, supply and demand also impacts the prices of bonds.  
     

In summary, the allocation for a 23 year old investor could likely be an 80, or 90% commitment to Stocks, and 10 or 20% commitment to Bonds, assuming the money is a long term investment.  

If you have a young adult who is asking about investing, feel free to pass along this “beginners” summary, and encourage them to invest now. Many professionals feel that this may be a great time to start.  Stay tuned next month for a discussion of investment strategies….passive versus active. 

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Wealth planning