financial advice for young people
My kids like to go to the park on weekends.
I’m amazed at how cool playgrounds are these days compared to the rust-ridden metal contraptions we were forced to play with as kids.
As you get older, it’s tempting to hate future generations because they don’t have the same experiences you did.
Youth are snowflakes these days. It’s all participatory trophies and helicopter parenting. when I was young…
But as someone who is now quickly approaching old man status, I find myself less at the get-of-my-lawn camp and more impressed by how much I feel than I was at their age. How many more prepared youth are there?
I have spoken to many college students, young professionals, young advisors and young investors over the years. They have better access to information and technology, they know more, they know where they want to be, they want to learn and they are bright.
They ask good questions too.
Going through our Google Docs for Portfolio Rescue this week, I noticed a large number of questions being asked from the youth.
So let’s empty the mail bag and go through some increasingly frequently asked questions to see what young people are asking these days:
What are the particular sectors/names that come to mind of a young investor, who is in their 20s, that in your opinion are most compelling for a 35-40 year time horizon?
It’s an easy one – I don’t know.
It is difficult to pick individual stock winners over the long term because many of today’s companies simply won’t be there in 3-4 decades.
Geoffrey West estimates that of the 29,000 or so public corporations that existed between 1950 and 2009, about 80% ceased to exist through bankruptcy, failure, mergers or purchases.
The biggest stocks that dominate the stock market change over time, as you can see from the top 10 biggest stocks in the S&P 500 in sectors going back to 1950:
Betting on tech stocks seems like a good idea for the future, but you’ll probably want some diversification through something like the Nasdaq 100.
However, in 3-4 decades your best bet is probably to simply buy the entire stock market through an index fund.
The corporation as a whole will continue to innovate and generate profits.
What will bring more value to a child in the long run? Pay for your kid’s fancy private college that totals 250k? Or just put $250k in an index fund for their retirement while they’re in college and send them to a middle-tier public school, which is essentially a full ride?
This is a question that is easier to answer as an older person than as a young person. It’s like telling someone who is newly engaged what a waste of money a big wedding is.
Few young people are going to share those sentiments.
My advice would be to avoid scolding them or forcing them to do what you would now with the benefit of sight.
Use this as a financial learning moment.
Mention their alternatives and talk about the advantages and disadvantages of each choice.
Then let them make an educated decision with all the facts in front of them.
And if they still choose the expensive school, at least they do so with their eyes open to the financial implications.
Long time viewers of the show, you all love the content that you have put up. I am 23 years old and have just graduated from college. I got my first job at a financial services firm and am wondering how I should allocate my earnings. Would you recommend focusing on paying off my student loans (about $30k) first? Or should I start building my portfolio?
I’m sure no one regrets paying off their student loans early, but there’s something to be said here to split the difference.
Developing good savings habits early is helpful.
Many people say they will start saving or making more money when they get older but it seems that something always gets in the way.
I like the idea of small victories as a psychological incentive so you can save more over time.
Let’s say you split the front of your budget 50/50 between savings and student loan repayment.
When you pay off your student loans, keep allocating that payment into the same bucket and you can supercharge your savings rate now that loan repayment stops.
What are some good questions to ask when choosing a financial advisor, especially as a young person?
Here are some ideas:
- What is your investment philosophy?
- How is the customer experience with your firm?
- How many times will we communicate each year?
- How will your firm help me as my finances become more complex?
- What do you charge a customer in my circumstances?
- How do you personally invest your money?
- How do you help me achieve my goals?
I have worked hard over the years, I am in my 30s and now I can buy a house with full cash without any debt. With such low interest rates, should I take a loan instead, finance the house and invest my capital in the stock market instead?
This question came before mortgage rates were 3% to 5%. The hurdle rate here can replace calculus but a lot of it comes from the tug of war between your relationship with debt and your desire for flexibility.
The problem with tying up the majority of its capital to a household is that it is not liquid. You can’t live your home.
Unless you can afford to pay off some form of debt, borrowing some money to buy a home, especially when you are younger, has some benefits.
It is tax-advantaged. It is a wonderful hedge against inflation since your payment is fixed. And it frees you up to use that cash elsewhere.
But there is no right or wrong answer here. It all depends on how you feel about taking the loan.
We did a lightning round on today’s portfolio hedge that included these questions and more:
Matt Lohius joins me to discuss the right way to provide financial advice to young clients.
Podcast version here:
40 Things I Didn’t Know Until Age 40