Four rules for investors under forty

Everything online, everything transparent at all times: when you view your portfolio with us, you can see that we are doing everything possible today. This often means using the latest technologies – but not chasing every new hype.

Our investment philosophy, on the other hand, is not so new. It has been tried and tested over many, many years by the best in the industry.

I remember a slightly older but no less insightful article by our American colleagues at Wealthfront, in which two of the greats have their say: Burton Malkiel, who became one of the pioneers of the ETF movement in the 1970s with his book «A Random Walk Down Wall Street,» and Warren Buffett, the greatest investment legend of our time.

I am always amazed at what we can learn from old masters like Warren Buffett and Burton Malkiel. From their combined 100+ years of investment experience (Buffett bought his first stock at age 11), Malkiel derives four rules for young people to follow in order to be successful investors – and I am happy to summarize these rules for investors:

Rule 1: Make investing a habit

Many people believe that investing is something for people who are older than they are. Young people in particular tend to agree: Investing money? I can start doing that when I'm 40. If they actually started investing at 40, that wouldn't be so bad. Unfortunately, however, by the time they reach 40, they have gotten into the habit of not putting anything aside. Instead, they spend all their money. As a result, they have unfortunately missed out on seeing the miracle of compound interest at work. From this perspective, they would already have come a long way. Not only would they already have a tidy sum tucked away, but they would also have the certainty that they created this wealth themselves – thanks to their good habits.

Rule 2: Invest regularly

Every time the financial markets are in crisis, we see the same behavior among investors: hardly anyone invests. Many even liquidate their entire investments. In 2008, 2009, and 2020 in particular, many people thought the world was coming to an end.

But the crisis is actually the perfect opportunity – at least according to legendary investor Warren Buffett. He likes to pick companies whose products, brands, and management he likes, and waits to buy them during a crisis.

Why does he do this? Let's hear it from him: «Let's play a little guessing game. Suppose you like hamburgers and want to eat one every now and then for the rest of your life. You're sure to buy hamburgers regularly over the next five years. What would you prefer? Would you rather the price of hamburgers go up or down?» You don't have to think long about that, do you? You want to buy hamburgers, so you want the price to go down. Buffett's next question isn't much harder: «Imagine you want to buy a car at some point in the next five years. Do you want the price to go up or down?» Unless you happen to be a car dealer, the answer to this question is also clear: you want the price to go down. Buffett's guessing game isn't that difficult. And here's the next one: «Now for the last question: suppose you want to invest money over the next few years. Should the price of stocks go up or down?»

Up, of course. That's what most people say. But really, only people who already own a lot of stocks and want to sell them soon should want that. For those who want to buy more, lower prices are a good opportunity. This doesn't just apply to Warren Buffett, who (as one of the very few investors, often successfully) has always waited for the right moment. It also applies to every ordinary investor who simply puts a little money aside every month. Because then they will have bought at exactly the right moment. Provided they stick to their plan with discipline.

Rule 3: Keep your emotions in check

Keeping a cool head is advisable. But that is precisely what many people find difficult. You can see what they are doing wrong on the stock market.

Most people don't buy at the lowest point. They are more likely to be among the many who sell there. Then they pull the covers over their heads and want nothing to do with investing for a while. When the markets have recovered a few years later, some of the investors come back. Then they buy – possibly at the highest prices.

The older ones among us remember: in the first quarter of 2000, the internet bubble reached its peak. And what did people invest in? Right, internet stocks. Yet there were solid investments available at the beginning of 2000. But they were ignored. People preferred to get rich quick.

Rule 4: Focus on the long term

As exciting as the prospect of short-term gains may be, short-term thinking usually causes problems. Overall, the market has generated reasonable returns over the long term. But only for investors who have acted slowly and cautiously. So practice patience and train your endurance. Because only those who stick with it will be successful in the long run.

Links

• Burt Malkiel’s Rule for Young Investors: Save Regularly

An earlier version of this article was published on June 17, 2015.