OShaughnessy - Millennial money : how young investors can build a fortune

HOW YOUNG INVESTORS CAN BUILD A FORTUNE

PATRICK OSHAUGHNESSY

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For Lauren, who makes me happy

CONTENTS

All information in this book is the property of OShaughnessy or the information providers and is protected by copyright and intellectual property laws. You may not reproduce, retransmit, disseminate, sell, publish, broadcast, or circulate the information or material in this book without the express written consent of OShaughnessy or the other information providers herein. This book does not constitute investment advice from OShaughnessy, his publisher, affiliates, or OShaughnessy Asset Management LLC.

This book contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. Neither OShaughnessy nor the information providers can guarantee the accuracy, completeness, or timeliness of any of the information in the book, including, but not limited to information originating with OShaughnessy, licensed by OShaughnessy from information providers, or gathered by OShaughnessy from publicly available sources. There may be omissions or inaccuracies in the information contained in the book. Neither OShaughnessy, the publisher, nor any of the information providers shall have any liability, contingent or otherwise, for the accuracy, completeness, or timeliness of the information or for any decision made or action taken by you in reliance upon the information in this book. Neither OShaughnessy, the publisher, nor the information providers make any representations about the suitability of the information contained in the book and all such information is provided as is without warranty of any kind.

This book explores one of youths greatest advantages: the chance to build a fortune by making early investments in the stock market. Unfortunately, this is an advantage that is too often wasted on the young. We tend to start investing too late, and in so doing miss our once-in-a-lifetime chance to build significant personal wealth. While many miss out on this chance, you dont have to. Millennial Money explores every facet of your opportunity. It describes why youth trumps everything in investing, how your investments will protect you from obstacles in the future, and what you need to do to transform your small early investments into large sums. The task is surprisingly straightforwardall you need to do is start young and choose investments that will grow your money at the most impressive rate. But with so many investment options out thereand so many ways to make mistakesit is important to make smart decisions early on. This book will show you why you should start investing now, show you how to build a winning portfolio, and teach you to become a successful investor.

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Its funny that we spend so many hours each week working hard to earn money and build our careers, but then spend very little time thinking about how to put our money to good use. This is a shame, because your young moneyeven in modest amountshas tremendous potential. It is up to you to make that potential a reality. Moneys potential fades with time, so there is no time like the present to get started. One dollar invested today can easily be worth $15 in forty years; but if you wait ten more years to get started, the same dollar might only grow to $7.50. Imagine how different your lifestyle would be in your later years with twice the amount of money in the bank.

Think of yourself as a business. You earn and you spend, just like any business. A good business spends less than it earns in sales, so that it produces profits. The fastest growing businesses are ones that take those profits and reinvest in themselves in order to grow. You should mimic this business plan. If you spend everything you earn, then you wont grow. Instead, you should spend less than you earn and reinvest those personal profits for future growth. The success of this personal business plan depends on two things: how much you save and what you do with your savings. Unfortunately, Americans are moving in the wrong direction on both counts.

The savings ratewhich is the best way to measure our personal profit marginhas been falling for decades. In the 1970s, Americans saved about 12 percent of their income. The savings rate has fallen ever since, all the way to 4.2 percent in November 2013. Where you put your savings is key, and the stock market is the best way to make your money grow, but investors in generaland millennials specificallyhave grown skeptical of the market. Millennials worry about the future, but our experiences have left us leery of risky investments. A survey conducted in 2013 found that our generations top concern was having enough money for retirement: 73 percent of millennial respondents said that they were worried, somewhat worried, or very worried about a secure retirement. Clearly, the two market crashes that weve lived through, in 2000 and 2008, have both made a lasting impression on our opinions about stocks.

These two trends need reversing. You should invest as high a percentage of your income as possible, and you should invest in the global stock market rather than in low-risk alternatives like cash or bonds.

As I will explore, you should invest in the stock market for two reasons.

First, you should invest so that you can passively participate in business growth around the world, which has always advanced at an impressive rateso impressive that stocks have always trumped all alternatives. Think of the companies that produce your favorite products or offer the best servicesthe shareholders of those companies have reaped huge rewards. Think of one such product: the iPod. In October 2001, the cost of a shiny new, first generation iPod was $500. At the time, the same $500 would have bought you 64 shares of Apple stock. The 2001 iPod has been rendered obsolete ten times over, but the 64 shares are now worth $32,308. Investing is better than spending. When you own shares of a company, you have thousands of people working for you; you get to ride the wave of global innovation and growth. The sea can be choppy at times, but over the long term you will be rewarded handsomely for participating in the global market.

Second, you should invest to protect yourself from a wide range of risks in the futurelike income inequality, rising debt, and an aging population. Other options, like cash and bonds, will not offer you the same protection. This may strike you as backwardmany people dislike stocks because they think that they are too risky. Risk is the slippery pig of the investing world, with countless definitions. Unfortunately, most definitions of risk are focused on the short term. They measure how much an investment bounces around over months or a year. Evaluated this way, stocks are indeed risky. But risk should be a long-term measure. Real risk is the chance that (1) you wont achieve your financial goals and the dreams associated with those goals and (2) that you wont be able to support yourself (and your loved ones) comfortably later in life. If you define risk as I do, then stocks become the safest place for your money. The investing rules I propose in Millennial Money