Millennials have been taking some heat for the past couple of years on the state of their finances. My generation needs some financial guidance, sure, but there’s no way they’re going to take it from someone that’s much older than they are. They don’t want a lecture from another generation telling them what they should or shouldn’t do. We millennials need to hear from someone our own age that offers advice we can actaully understand that’s helpful instead of condescending. Enter my friend, Patrick O-Shaughnessy, who’s written a great book called Millennial Money: How Young Investors Can Build a Fortune for this exact purpose. I asked Patrick if he would answer a few questions that I think are important to understand for what will soon be the largest demographic in the United States.
Patrick: The problem is a lack of basic education. Most people leave high school (and sometimes college) with no understanding of things like compound returns, stocks, bonds, commodities, or retirement accounts…and the list goes on. It’s a shame that there isn’t a high school class that covers these topics at a very basic level, because it would make a huge difference. It is a cruel reality that most people don’t get interested in investing until later in their careers, when the advantage of youth (time in the market) has faded. I find that when you walk young people through the basics, they start investing right away.
Ben: What will it take to change the behavior of millennials when it comes to saving and investing?
Patrick: I am a big believer in making saving and investing automatic. We are lazy and have limited attention, so its best if saving and investing happen behind the scenes, without us having to do anything. Every 401(k) program should auto-enroll employees and require them to opt-out if they don’t want to invest. One study of a large corporate 401(k) plan showed that under the opt-in method (which requires people to actually do something), 37.5% of employees participated in the 401(k) program. But under the opt-out method (where people don’t have to do anything) 85.9% participated. We tend to stick with default options, so wherever possible the default should be to save and invest.
There are tons of interesting new companies that are using the power of automation to help young people build wealth slowly. My favorite concept is from a company called Acorns. They round up small purchases to the nearest dollar and invest the difference automatically. Liftoff, Wealthfront, Betterment, and Personal Capital all provide great services as well.
Ben: How do the advances in technology help or hurt young people’s finances?
Patrick: Technology is a mixed bag. On the one hand, it has led to much easier and cheaper access to global markets, which is great. It is amazing that you can own a slice of all major global businesses almost for free. But technology can be bad too. For example:
- Exchange traded funds (ETFs) are amazing, but they may encourage overtrading.
- I get emails every single week from companies that monitor my investment accounts (e.g. Personal Capital) telling me what my return was the prior week. This may seem like a nice convenience but it is actually very dangerous. The more often we check our portfolios, the more likely we are to do something stupid (especially at market extremes, when it is most important to DO NOTHING).
- The flash crash wouldn’t have happened in 1960.
40 years ago it would have been very hard to get precise measurements of our returns every day or week. Even S&P had to reduce the number of stocks in their index because it was too hard to frequently calculate the index with hundreds of companies. The lack of constant news, updates, and information probably helped investors stay the course.
Ben: In the book, you discuss the benefits of using a systematic, rules-based approach to investing. What are some of the biggest mistakes investors make with a systematic approach?
Patrick: They stop using their strategy when the going gets tough. The entire reason a systematic approach works (and why backtests of systematic strategies always look so good) is that it bakes discipline and consistency into the investment process. As soon as those features are ignored or abandoned, the efficacy of the systematic approach evaporates.
Imagine a systematic value investor checking their account in January, 2000. They’d look back five years and see terrible returns relative to the market. Five years is an eternity in markets, so sticking with a strategy after five years of failure is psychologically difficult to do. Many abandoned value at exactly the wrong time. Those that stuck with it were richly rewarded.
There is a reason my book has one chapter on the specific strategy I recommend and three on controlling investor behavior. The x-factor in any investing strategy is the investor herself. Without mastery of one’s own behavior, the strategy you chose won’t matter.
Ben: Knowing what you know now, what would you do differently if you were just getting out of college and entering the working world?
Patrick: I think the best use of one’s early 20’s is to read as much as possible. Read about what interests you (which hopefully syncs with your chosen career), but also experiment by reading broadly about as many topics as you can. Find other people who are ambitious and interested and spend lots of time with them. I am a borderline introvert in the Jungian sense (I mostly lose energy in a crowd), so I was very slow to start meeting people. I wish I hadn’t waited so long to build a network. I like the idea that you are the average of the five or ten people you spend the most time with, so make sure your core group is filled with engaged and interested people, not layabouts. Focus on good books and good people.
Great stuff. Thanks Patrick.
Find the book here: Millennial Money: How Young Investors Can Build a Fortune
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