Four rules for investors under forty

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

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

I recently found a nice 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 investing legend of our time.

I am always amazed at what you can learn from old masters like Warren Buffett or Burton Malkiel. From their combined investment experience of over 100 years, Malkiel derives four rules that young people should follow in order to be successful in investing – and I like to summarize these rules for investors:

Rule 1: Make investing a habit

Many people believe that investing is for people older than themselves. Young people in particular agree: Investing money? I can start doing that at 40. If they really started investing at 40, that wouldn't be so bad. Unfortunately, however, by the time they are 40 they have got into the habit of putting nothing aside. Instead, they spend all their money. Unfortunately, they missed out on watching the miracle of compound interest at work. From this point of view, they would have already come a long way. Not only would they already have a tidy sum on the high edge. They would also have the certainty that they have created this wealth themselves – thanks to their good habits.

Rule 2: Invest regularly

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

Yet the crisis was the opportunity par excellence – at least that's how investing legend Warren Buffett sees it. He likes to pick companies whose products, brands and management he thinks are good and wait to buy them during the crisis.

Why does he do this? It's best to let him speak for himself: «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 will certainly be buying hamburgers regularly for the next five years. What would you prefer? Should 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 fall. Buffett's next question is not much more difficult: «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: the price should fall. Not that difficult, the guessing game with Buffett. And then it continues: «Now for the last question: Suppose you want to invest money over the next few years. Should the price of shares rise or fall?».

Rise, of course. That's what most people say. But only people who already have a lot of shares and want to sell them soon should actually want this. For those who want to buy, lower prices are a good opportunity. This not only applies to Warren Buffett, who (as one of the very few investors who was often successful) always waited for the right time. It also applies to every normal investor who simply puts some money aside each month. Because they will have bought exactly at the low point. If they follow their plan with discipline.

Rule 3: Keep your emotions in check

Keeping a cool head would be appropriate. But this is exactly what many people find difficult. You can see what they are doing wrong on the stock market.

Most people don't buy at a low point. Rather, they are among the many who sell there. Afterward, they pull the covers over their heads and want nothing to do with investing for a while. When the markets have done well again a few years later, some investors come back. Then they buy – possibly already at the highs.

Let's remember the year 2000: the Internet bubble peaked in the first quarter. And what did people invest in? That's right, in Internet funds. There were also solid investments at the beginning of 2000. But they were left behind. Better to get rich quick.

Rule 4: Go for the long haul

As exciting as the prospect of short-term gains may be, short-term thinking usually leads to problems. Overall, the market has delivered reasonable long-term returns. But only for those investors who have acted slowly and prudently. So exercise patience and train your perseverance. Because only those who keep at it will be successful in the long term.

Links

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