As I’m sure you’ve heard, 75% of young people voted to Remain in the recent EU Referendum. Given the result, many will now be concerned for their future and, in these uncertain times, they may be hesitant to make financial plans. As a wealth adviser, I can appreciate how difficult talking about saving for the long-term can be — especially with your children or grandchildren. In his latest post, my colleague Andy Hearne quoted William Bernstein, a best-selling author whose practical guides teach readers with varying degrees of financial expertise to apply his investing principles, which are based on modern portfolio theory. Bernstein’s latest book is aimed directly at millennials and is perhaps the most condensed and accessible version of his financial theories to date.
In ‘If You Can: How Millennials Can Get Rich Slowly,’ Bernstein outlines a disciplined and sensible approach to saving for retirement in plain language intended to provoke readers into action. He writes in the opening chapters, “I am writing this book for my children, and for the millions of young people who don’t have a prayer of retiring successfully unless they take control of their saving and investing.” This short read is rich in financial advice and tackles concepts from breaking down the turbulent landscape of the stock market to setting up a private pension.
“I am writing this book for my children, and for the millions of young people who don’t have a prayer of retiring successfully unless they take control of their saving and investing.” – William Bernstein
Below are five lessons that I believe every millennial should learn in order to achieve a healthy approach to their finances.
Lesson 1: Dinner Out Now = “Eating Cat Food at 70”
Of course, in the moment, it seems necessary to your health and well-being to buy that daily coffee or ensure that you have every channel on your TV. But these little expenditures add up and will cost you in the long run. (Check out my post on the long-term effects of that extra 50p). As Bernstein puts it, “People spend too much money … Life without [these expenditures] may seem Spartan, but it doesn’t compare to being old and poor.”
This seems like an exaggeration, but it’s not if you consider that the average millennial will retire at 75, maybe even 80. The horrifying truth is that you may not be able to retire at all if you don’t cut spending now. Cutting down unnecessary spending means young people are more likely to clear their debt earlier and start saving earlier too. Bernstein was correct when he stated: “If this doesn’t scare your spending habits straight, nothing will.”
Lesson 2: If You Want High Returns, Expect High Risks
Saving and investing go hand in hand. As Bernstein puts it: “even if you can invest like Warren Buffet, if you can’t save, you’ll die poor.”There is a fine balance between making your money work for you, and keeping it. He advises against trying to play the market, stating that: “There are only two kinds of investors: those who don’t know where the market is headed and those who don’t know that they don’t know.”Predicting the market is like trying to be an expert in predicting coin tosses.
“There are only two kinds of investors: those who don’t know where the market is headed and those who don’t know that they don’t know.” – William Bernstein
There is always an element of risk when investing and it’s important to understand your tolerance to it. At Quadrant, we offer a free online questionnaire that helps investors to understand their risk profile. Few will feel comfortable going for broke to make big money. Big gains require serious gambling. At Quadrant, as with Bernstein, we advise slower growth strategies. Moderate-to-low risk investment may not seem as exciting or lucrative, but it will serve you better in the long run. Bernstein puts it like this: “If you want high returns, you’re going to occasionally have to endure ferocious losses with equanimity, and if you want safety, you’re going to have to endure low returns.”
Lesson 3: Bet on Diversification
A general awareness of the high-risk and the chaotic nature of the stock market is imperative for lucrative investing. Bernstein explains this perfectly: “If you don’t recognise the landscape you will get lost.” This doesn’t mean searching for patterns in stock market activity, but looking at the historical data can be useful in teaching that diversification is your best bet.
There is a correlation between the health of the economy and the strength of returns in the stock market. Bernstein asks you to ignore optimism in the market, because “in the market… the best fishing is done in stormy waters.” He goes on to break this idea down, explaining what the difference is between a stock and a bond. He offers advice on fixed allocations and the importance of staying the course in good times and bad.
Lesson 4: Don’t Believe the Hype
Even with a firm and straightforward investment plan, the strongest of investors can be swayed by a ‘gut feeling’. The book puts it this way: “Human nature turns out to be a virtual Petrie dish of financially pathologic behaviour.” (Andrew Pereira explored this in his recent blog on common investor biases). The issue isn’t investing in the first place; it’s staying invested when the economy looks ready to collapse.
Bernstein argues that human beings are just not made for decisions in the long-term, as by nature we are only able to calculate short-term risks. Our survival instinct means it is hard for us to stay the course when it comes to our investments.
Financially, our main downfall is how we view things as relational. It means that we look for patterns where there are none. In fact, according to Bernstein: “Ninety-Five percent of what happens in finance is random noise, yet investors constantly convince themselves that they see patterns in market activity.” This may seem counter- intuitive, but when investing in the stock market you can’t trust your ‘gut feeling,’ because it only sees the short-term fall, not the long-term profit.
Lesson 5: Beware of Hidden Costs
As Bernstein explains; “If an investment company raises its fund fees from 1.0% to 1.5%, it has just raised its revenues by 50%, but you are unlikely to notice its effect on your performance for many years, if ever.” The problems of cost opacity and cost control are widespread across the industry. Fund managers too frequently exercise poor controls, or worse, use smoke-and-mirror tactics to make money for themselves while investors take all the risks. To learn more about the cost of investing read our blog Compounding – Why 1% Matters.
Fund managers too frequently exercise poor controls, or worse, use smoke-and-mirror tactics to make money for themselves while investors take all the risks.
At Quadrant, we keep our fees low and transparent. Unlike Bernstein’s ‘financial monsters,’ we do not promise more than the market has to offer and have no hidden costs in our products. We don’t agree with charging high rates for non-services like market predictions. Rather, we aim to coach our clients through long-term investments and make financial decisions based on evidence.
So, these are the five lessons I think would be useful for millennials when thinking about saving and investing. If you’re interested in discussing an investment plan for your family or yourself, please get in touch. If you’re interested in reading more of Bernstein’s eBook, which I highly recommend, here’s a free copy.
This article does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections.