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Investing 101 for young investors

May 14, 2020 | Thomas Smith


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.

Thomas with two sons playing basketball in driveway

During the Coronavirus lockdown, we had all of our adult sons living with us for an eight week period of time.  This offered the opportunity to work together and in some cases study together.

I discovered that I have a really fun family.  As the steady drumbeat of this pandemic continued, I heard 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 was inconvenienced, we were delighted that we had our entire family with us. I realize that I was probably in the minority, but for Pam and me, this was “Christmas in Spring”…shelter in place style. We were 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 sympathized with those families! With sons aged 23, 21, 19, and 17….Pam and I were having a blast! Our oldest son works for a Big 4 accounting firm out of Dallas, and since his office was closed, he decided to come back to Tyler to work remotely.  We have two college sons, who came back to Tyler and completed their studies remotely.  Finally, we have a high school Junior who completed his high school work remotely and was delighted to have his big brothers unexpectedly back in town. 

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

Our activities included rousing games of Catan, Yahtzee, Rook, Risk, Spades, and Balderdash.  We ploughed through a variety of puzzles, 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, was a college Junior, and a Marine Reservist. Both have discretionary income, and since we were all working remotely from our home, they had access to me during the workday.  They both began investing over a year ago and had seen their modest portfolios rise, fall, and then rise again over the past year.  As a result, they became more interested in the Stock Market during the pandemic. They began asking me more questions about investing, and the timing of deploying new money.  What follows is a summary of my investment thoughts as I 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. I believe this proved to be true as the market appears to have largely recovered.
  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. As of this writing, the "recovery" seems to have rewarded those investors who remained invested.
  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 could realize a 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 can be 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 advise that for a long-term investor, there is no bad time to start investing.  Stay tuned next month for a discussion of investment strategies….passive versus active. 


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