How to invest: an open letter to my children

When my maternal grandparents died they gifted some shares of stock to the family. After learning the company names and ticker symbols, International Paper and Dial Soap, I would frequently flip to the back of the newspaper to look up their current price. Eventually, I would use dialup internet (AOL) to “quickly” check stock quotes online.

Ironically, I hope you are reading that preceding paragraph wondering what Stone Age companies and technologies I’m referring to and needing an interpreter. I hope much time has passed and we all lived a long life. I hope these lessons were imparted to you long before you read this and that we had an opportunity to learn together.

However, if we don’t have that chance, I want to share some words of wisdom with you. As always, take what’s helpful and leave the rest – you decide. These words represent 20+ years of reading, research, and countless errors. May you prosper and avoid some of my mistakes along the way.

Investing can be thrilling. I remember the first time our total account value went up in a day more than a day’s work. Imagine working eight hours for $160, and then opening up your investment account to another $160 gain. I invested in Apple, Google, and other tech companies early on – seeing them reach many multiples from the original stock purchase. Sadly and more frequently, I would sell those high flyers before they reached those multiples, missing out on vast gains.

Investing should be boring. Our gains from individual companies pale in comparison to simple index funds. Low-cost, market funds that try to buy up most of the investable world serve a very different purpose. These are long-term bets on the world economy. When the funds go up, it’s a result of our collective successes. You won’t ever perform better than the global sum, but you won’t be worse off either. And I like rooting for the world. It’s our original home team.

I can’t say how the market will perform this year. I can’t say what companies will succeed in the next decade. I can’t say whether this next 30-year period will be lost and your working income will represent more of your wealth and growth. Anyone who says they can guarantee your returns is either lying to you, to themselves, or on behalf of others. I want you to be inoculated against this mental deception early on. Although, there is one thing we can control: fees. Never allow someone to sell you investment advice or products that cost something like 1% per annum. Over the course of your investing life, you will spend hundreds of thousands if not millions for this “professional advice.”

Instead, I want you to read three timeless books. First, A Random Walk Down Wall Street by Burton Malkiel. The author guides readers through various errors in behavioral economics and trends in investing psyche. Malkiel helped me understand where to maximize gains and reduce fees. Second, I Will Teach You to Be Rich by Ramit Sethi. This was one of the first “personal finance” books I ever read. Focus on automating what you can and structuring your life to support a “rich” life (think beyond the material, as well). Third, The Psychology of Money by Morgan Housel. Filled with quotes and inspiring tidbits, Housel’s work will help you question your ego and assumptions when investing. Please read them and internalize their messages. Perhaps your context in life has changed, and investing is not what it is today. Ask for advice from accountants, lawyers, and other fiduciaries if the ideas are confusing.

John Maynard Keynes, a famous economist from the early 20^th century, is credited with saying, “The market can stay irrational longer than you can stay solvent.” If you take a keen interest in investing during your lives, you will see bubbles and crashes. You will see others’ wealth evaporate, and your accounts will likely shrink, too. You likely will be inclined to protect your wealth or grow it even faster. You might see the decline in the stock market and wonder whether you should get out before the big drop, or invest heavily as people rush to enter during a frenzied buying spree. I would generally caution you from taking such actions as long as you’re diversely invested in the market. One of the wisest investors and founder of Vanguard (one of the only investment firms I trust), Jack Bogle, suggested, “Don’t just do something, stand there!” Stay engaged and informed, but oftentimes, the best action is nothing.

Relatedly, buying low and selling high is unhelpful advice. I have no idea what investing will look like for you or the generations to come, but this oft-parroted line has bothered me since I first heard it. When is the market too high? Too low? I have never in all my investing life been able to call a top or bottom. Never. The statement is meaningless, as it doesn’t provide any actual advice or feedback about how to buy low and sell high. The only way to do this is by holding some majority investment in stocks/equities, and then a portion in bonds (for instance, 90% stocks and 10% bonds). As the market tumbles, rebalancing to the distribution allows you to buy during dips and sell during wild swings up. This is the only reasonable method to buy low and sell high.

Pay your taxes and enjoy doing so. I truly hope you pay more in taxes as a percentage and in actual dollars than we ever did. That would tell me two things: you live in a liberal democracy and you have prospered. Currently, there are zero liberal democracies who do not charge income taxes. The lesson for me is that a functioning, civil society requires taxation. It’s the price of democracy. I am grateful that you are Canadian and American citizens. You have choices, but be grateful that you were born into countries with histories of liberal democracies (even if they are fragile as I write this letter). Be generous with your country and those in your community, whether by taxation or donation.

There’s an old adage that says, “Wealth only lasts three generations.” Unfortunately, research suggests most wealth is lost by the third generation. Against the odds, I write this letter to you, hoping for better. We didn’t grow up with this wealth. We want better for you, and also for generations that will never know us. Please consider this in your decision-making, as we want your kids, their kids, and their kids’ kids to know we worked hard to provide stability and security.

Ask yourself what enough is routinely. Beyond a simple number, envision what enough material wealth and health is to you and yours. Work backwards from your dreams to create them. And know that we always saw you as enough. Always.

With love, eternally.

S.