November 6, 2017
I’m often asked by my friends how to get started with investing. Most of them are college graduates but have had very little education on financial management or investing. At most universities this is something you have to seek out. My friends are well aware of the need to work hard, keep costs under control, and save money. However, when it comes to making decisions on where to invest accumulated savings, most of them have never had any guidance on basic investing principles.
Consequently, many of the conversations with my friends on investing are not about asset allocation, the timeframe for holding investments, diversification, or the pros and cons of different investment options. Instead they boil down to very “mechanical” questions about different account custodians and/or popular investing apps. Typical questions include: “How long does xyz custodian/app take to set up?”, “How easy is it to use?”, “How much control will I have?” and the popular “How much does it cost me?” It is questions like these that have made me realize that ease of access and use are chief concerns for millennial investors. Growing up in a period of rapid technological proliferation has made these two qualities paramount in the success of most millennial-backed products and services. For example, Halloween costume ideas made Amazon a powerful resource for me, as acquiring both a rock star wig and play samurai sword (different costumes thankfully) was both easy and accessible.
As a result, it is very easy for millennials to begin investing after gathering “all” the required information through a quick Google search. This creates a real danger for the unsophisticated young investor: the comfort with technology, allied with the ready availability of easy to use apps, means that inappropriate risks can be taken unwittingly. Moreover, the absence of an investment plan, combined with inadequate self awareness and emotional regulation, can lead to decisions which compound the problem. Early success can lead to joy and overconfidence: “It’s doing so well! I was right! I want even more!”. Early failure can produce anger and sadness: “It was supposed to soar! I can’t believe I trusted it. I should’ve bought less”. For some people a constant sense of foreboding begins to develop: “What happens if it goes down? What if I missed the right time?”.
Like everyone else, young investors should be fully aware of how their individual tendencies will affect their investment management decisions if they are going to be successful. Even with a high level of self awareness, it is still critical to have the discipline of a well-constructed investment strategy and plan. In many ways this is even more important for someone in their twenties given they likely have a very long term investment horizon. Only we know if we are the type to draw the curtains before the finale because we hated the second and third acts. Maybe we all need to be encouraged to stay and watch what may well be the best part of the show.