The name probably gives it away, but if you hadn’t guessed, we at Young and the Invested spend a lot of our bandwidth preparing people for their investing journeys.
The thing about investing tips is…they’re not all on point.
When we pass along advice, we’re not just passing on what we’ve learned and what we’ve experienced—we’re also filtering out a lot of the riff raff, from outdated and disproven theories to tired old cliches like “Sell in May and go away.”
Advice isn’t static—laws, environments, and circumstances can change over time, so the best strategies of yesterday might not hold up today. Thus, you should always be on the lookout for sage investing tips…but also mindful of when it’s time to ditch outdated guidance.
And we’re not the only ones who think that way.
Today, we’re sharing a recent discussion we had with Jan Blakeley Holman, the Director of Advisor Education at Thornburg Investment Management, which manages roughly $41 billion in client assets and offers a suite of mutual funds and closed-end funds (CEFs).
The topic du jour? Three of her favorite investment ideas…and three investment tips that are best left in the trash.
Favorite investing tip #3: Become an expert in the value of compounding
The basic idea of compounding is that, given time, you can take a sum of money and reinvest what you earn to grow it even faster over time.
For instance: If you put your money into a savings account, compounding the interest earned from that account will grow that money a little bit faster, year after year. Or if you invest in dividend stocks, compounded returns from the growth of (and reinvesting dividends back into) those stocks will snowball into faster growth as the years roll on.
It’s a really powerful force—one that people frequently underestimate because it does take time to pick up momentum. So Holman provides an example to help people reconfigure how they think about compounding:
“Assume you had a choice of working 35 days with a pay of $1,000 per day or working for a penny the first day and doubling that amount each day for 35 days. Which choice would you make?” Holman asks. “If you chose to receive $1,000 per day, you will have $35,000 at the end of 35 days. Not bad! If you chose the second choice, by the end of 35 days you would have received more than $340 million!.
“I know that sounds insane, but it’s not…Remember, the first day you have 1 penny, the second day you’ll receive 2 more, the third day you’ll receive 4 more, the fifth day you’ll receive 8 more, etc.”
People don’t always warm to this advice right away.
“I think sometimes waiting for compounding is something that people understand after they don’t wait for anything. So they take some action, expect to get some return, a large return very quickly, and it might not work out very well,” Holman says. Indeed, many of the same people who lost out a couple years ago when the “meme stock” bubble burst have become a lot more receptive to safer growth vehicles like high-yield savings accounts of late.
“I think people have to get bitten before they figure it out.”
Favorite investing tip #2: Make use of dollar-cost averaging and systematic investing
This advice has to do with a pair of “set-it-and-forget-it” investment strategies:
- Systematic investing is a simple saving strategy where you invest a fixed amount of money at regular intervals. You can always grow that fixed amount over time, but the idea is to build a habit of saving and investing. (Example: Every month, you put $100 into your investment account and buy stocks and funds with that money.)
- Dollar-cost averaging is an investment strategy with a similar concept—you regularly invest a fixed amount of money into, say, a stock or fund, regardless of its price or market conditions. Basically, it allows you to buy more of an asset when it’s cheap, and less of it when it’s expensive. (Example: Every month, you spend roughly $50 buying Fund X. In January, it’s $10 per share, so you buy five shares. In February, it’s $8 per share, so you buy six shares. In March, it’s $12 per share, so you buy four shares.)
Combined, these strategies make investing a habit and prevent you from trying to perfectly time the market—something even trained professionals struggle to do.
There’s no “right” interval of time to commit your money, but Holman suggests contributing from every paycheck.
“This needs to be made easy,” she says, “And easy is: Money comes out of my paycheck or income or cash account every month and goes into the investments. Over and over again.”
Favorite investing tip #1: Stay the course
As a general rule, the best thing you can do when you invest is stay the course—or, in short, stay calm, and keep your money invested, even when things seem craz.
That doesn’t mean you should hold every stock and fund for eternity. Good companies can falter. Actively managed funds can change managers.
But it does mean that your portfolio should be built with the long term in mind, and that even when we go through periods of economic or stock-market difficulty, you don’t just mindlessly sell all of your investments during a crash, then vow to reinvest that cash when everything feels safe. Because for the most part, people are terrible at timing the market. Just consider a few hypotheticals during the COVID bear market and recovery:
Look at how much of the recovery gains investors might have lost out on had they pulled their money during the crash and didn’t jump back in until the investing environment felt comfortable enough.
Of course, saying “stay calm” is like saying “lose weight.” Sure, it’s usually good advice, but it’s too vague to be helpful. So here’s something to pin to your wall as a reminder anytime you’re worried about the market:
“What has helped me over the years is to understand that when you look at returns from equities, for example, on the S&P 500 for the past 50 years, the shorter you hold the investment, the more likely you are to lose money,” Holman says. “Whereas if you hold an investment for 15, 20 years, given 50 years of data on the S&P 500, you will not have lost money.
“Now I know, past performance doesn’t guarantee future performance, but you know, we can learn some things from history.”
Investing tip to trash #3: Invest in cryptocurrencies
Cryptocurrencies are simultaneously a developing technology and investment—one that has made a lot of people rich…but ruined some fortunes, too. It has been awash in controversy, scams and legal battles. Some of the biggest crypto platforms (think FTX) have already folded, and several (think Binance and Coinbase) face charges by the SEC.
We haven’t completely closed our books on cryptocurrencies, though we do warn any would-be buyers that crypto is both volatile as an investment and on potentially shaky existential ground given regulators’ stance on it.
Holman, however, has drawn a clear line.
“I think until crypto is regulated, and I mean really regulated, it’s just super dangerous,” she says. “And investors take enough risk as it is.
“For some people, just buying stocks is a risk, even though with 200-plus years of history we know that stocks are great investments, equities are great investments, and there is a time for bonds, and a reason to hold bonds. So why does someone have to go to the way-way extreme in taking risk and put money in something like cryptocurrency?”
Investing tip to trash #2: The “60/40 portfolio” is dead
The 60/40 portfolio is a classic “balanced” portfolio that invests 60% of its funds in stocks and the other 40% in bonds. The idea? You have some of your money tied up in stocks, which have the potential to grow. And you have some of your money tied up in bonds, which don’t have much growth potential but can earn you consistent income over time—even when stocks aren’t performing well.
But the internet is littered with claims that the 60/40 portfolio is “dead.” (No, seriously, go look it up. We’ll wait.) The reasons are myriad, but the primary concerns are that the 60/40 portfolio doesn’t grow people’s nest eggs quickly enough, and that alternative investments (read: investments that aren’t stocks and bonds) deserve a place in modern portfolios, too.
Holman says the issue isn’t nearly so clear-cut.
“Even at the end of last year, many investment pundits were talking about the death of the 60/40 portfolio,” she says. “And I actually don’t agree with that. Yes, [the 60/40 portfolio] was down 16%-plus in 2022. But over the past 30 years, it has an annualized return of positive 8.2%.”
At the same time, however, she concedes that for younger people, “60/40 is a little too conservative in terms of the percentage allocated to equities because of [how much time they have to invest]. I would say if someone is a long-term, really long-term investor, like 20 or 30 years or so, having a higher allocation to equities makes more sense.”
But remember: Every investor is in their own unique situation. As a great for-instance, Holman says that if a manager has a fiduciary relationship to, say, an organization or a foundation, “I believe they have to be more prudent, and that’s when a 60/40 portfolio works well.”
Investing tip to trash #1: Young people shouldn’t save for retirement
Holman came across a 2022 whitepaper insisting, based on a certain mathematical model, that most young people should not save for retirement.
We’ll be honest: That one blew us away!
While we understand that some young people might be financially unable to save for retirement, the idea that most young people should only focus on meeting their current spending needs is, at the very least, a little short-sighted.
“Regular investing, and investing through financial thick and thin, is a behavioral thing,” Holman says. “It is a habit. So to avoid the habit until one gets older is crazy.”
While you’ll certainly be able to make greater financial progress toward your retirement goals later in life when, say, you’re making more money and you’ve paid off student loans, if you don’t start the habit when you’re young, you’ll be armed with excuses to put it off when you’re older, too.
“When we begin working full time, there’s lots of demand for whatever we get in our paychecks,” Holman says. “First, there are the demands that are withdrawn immediately from our paychecks, whether those are federal, state taxes, our co-payments for insurances, etc. But after those are paid, we also must use the money that we have left over for other expenses, and often, there’s not much left.”
“But we have things that are competing for our dollars throughout our entire lives,” Holman says. “It’s student debt first, but then it’s buying a home for the first time, having children, then paying for their education—all while we’re still trying to save for retirement.”
In short: Even if it’s just a few dollars here and there, start investing and investing regularly, while you’re young.
Older you will thank you.
Riley & Kyle
Young & The Invested (Soon to be WealthUp)
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.