Hypothetical Henry 2.0: Time to Get Serious About Investing

Almost 200 blog posts ago, I came up with the seemingly pragmatic idea of trying to encourage younger gens among us (then it was Millennials and Gen Zers) to start saving and investing at an early age. What better time to start preparing for retirement than when you get that first job…that first paycheck?

Looking Back...

Now, with two more young gens in the picture (Gen Alpha and the latest, Gen Beta), it's time to check back on what these now "elder" gens are doing. In my blog, Hypothetical Henry: Compounding His Way to College, posted in August 2019, I provided my then 13-year-old grandson, Henry, insights on what can happen when parents and/or grandparents invest money at their youngster’s birth or early in his/her life.

One of my first orders of business in creating the Wynn$ights blog was to help simplify the approach to saving and investing. Start small, as in saving a few bucks a month, and focus on some basic commonsense principles. I call ‘em the PDQ Principles: Patience, Diversification and Quality. Of course there are other key factors involved in saving and investing, but without accumulating a high-quality, well-diversified  portfolio and exercising patience with those investments, young folks will find themselves chasing numerous pitches outside the strike zone.

Next Phase

Now a new day has dawned. It’s 2025, and Henry's graduation (from high school) is in the rearview mirror. Henry's in college and enjoying the fruits of early saving, investing and compounding. But adulthood lurks...

It's time for him to start PDQ-ing on. his. own. It's never too early and there's lots of elders out here willing to pass on their hard-earned knowledge.

Advice from the Greats

There are two prominent figures in the investment game that I admire beyond others: the late John Bogle and Warren Buffett, the Omaha Oracle. When I think of those two financial gurus, memorable quotes attributable to each come to mind.

Bogle is thought to have minted, “Don’t look for the needle in the haystack. Just buy the haystack.” What better sales pitch for index funds than that simple statement? Admittedly, you buy tiny interests in some real stinkers taking that approach, but you also buy tiny interests in a bunch of gems.

And then there is the Oracle’s sage pair of rules:

• Rule #1: Never lose money.

• Rule #2: Never forget Rule #1.

Easier said than done, of course, but it’s advice one should always keep in mind when investing. Always…always try not to lose any portion of your investment portfolio. You’ve heard me praise the amazing power of compounding. It's the eighth wonder of the world according to Albert Einstein. It’s context is simple. The more money you have in your portfolio, the more money you will make.

Emergencies and Raids

The most important way to avoid raiding a portfolio is to accumulate a readily accessible emergency fund…because financial emergencies do happen in life. This fund will help you navigate those rough patches while keeping your portfolio intact.

In investing, focus first on the downside, and avoid those occasional costly raids on your retirement account as well as your nonretirement portfolio. Money drawn from those accounts to meet a current unavoidable crisis is money no longer compounding on your behalf. A six-month cache of emergency funds is key to avoiding short-term financial catastrophes.

Don't Flush

Loss avoidance, a strategy if you will, involves the development of an investment process. It will come as no surprise that I favor a long-term, buy-and-hold approach. In short, don’t flush when the market goes into one of its tailspins – as it occasionally surely will. This approach is all about exercising patience with your carefully-packaged quality portfolio. If you flush (sell) with the other quail, you will likely experience a covey of negative results. Selling during a panic often results in taking an unnecessary loss, or a quick sell might result in taking a premature gain – an unnecessary taxable event.

And when, pray tell, after bolting during a correction do you buy back in, if ever? Many investors, having flushed, are gun-shy and reluctant to rejoin the fray once the market begins to recover, resulting in large opportunity costs as a result. Be disciplined. Be patient. And by doing so, avoid becoming a trader, an individual who is constantly trying to time the market…often a losing proposition.

Time is Money

While we’re on that subject, no one can consistently time the market. A better approach is to develop the habit of dollar-cost-averaging. To be disciplined about dollar-cost-averaging, purchase stock or buy fund units with new money on a set schedule and automatically reinvest dividends and long-term capital gains regardless of the market’s behavior at a given point in time.

There’s an old saying that “Time in the market is more important than timing the market.” Countless studies show that most major gains in the market happen on very few trading days. You must always be there in order to enjoy those large upward adjustments.

Here's another Buffett classic: “Be fearful when others are greedy and greedy when others are fearful.” In short, go against the grain. This requires controlling your emotions, which is not an easy task. It’s part of that dollar-cost-averaging mentality.

The Easy Road

Once you develop good investing habits, you will worry less, if at all, about what other investors are doing. Odds are, you will continue buying quality stocks or units of mutual funds during downturns rather than worry about the behavior of others. Remember, in investing, you’re competing with yourself…with your own emotions…rein them in.

And by all means, don’t deal in investments that you don’t understand. Crypto! Really? If you deal in individual stocks versus mutual funds, try to think like an owner. After all, stocks are tiny fractional ownerships in a business. Pay attention to management and whether a company is financially strong and in a solid competitive position in its industry.

But remember this: If you don’t have the inclination or time to spend studying a company, you are probably better off investing in mutual funds, particularly index funds. I personally have little desire to spend time researching individual companies. Thus, I dare to be average, and am quite satisfied to settle for the market rate of return on my investments.

By the way, this approach fits quite well with new and/or inexperienced investors. Over time, with proper PDQ discipline, you will do amazingly well when compared with the average day trader. Timing the market is difficult, highly stressful and time-consuming. Build your portfolio around an S&P 500 or Total Stock Market Index fund and enjoy a more stress-free and fruitful life. A good night’s sleep is an important benefit in life.

Next Steps

Now back to Henry, who is experiencing the significant demands of his second college semester. Is he employed? Yes. His current job is to properly prepare himself for a productive future. While doing so, is he earning his keep? I dare say he is. He graduated number two in his high school class, a scholarly achievement that garnered him several beneficial scholarships while earning the equivalent of a semester of college credits.

These accomplishments more than covered the cost of his first year at a major university with plenty of room to spare to begin his journey as a committed Vanguard investor. Will Henry become a dedicated PDQ investor? That remains to be seen. But as of today, he is two decades ahead of most young adults in preparing for his financial future…much of it his own doing with the guidance of good parenting (and grandparenting)!