Investing and bridging the generation gap
Few, if any, customers entering a car showroom expect the salesperson to explain the intricacies of the internal combustion engine. If they like the car, they’ll buy it and drive away. Greg believes it is a similar story with investors.
Greg believes many younger – and older – adults are deterred from investing because they think it is too complex and that specialist knowledge of all sorts of financial terms and instruments is required to participate.
That means, says Greg, that:
There is a real tendency to adopt the proverbial ostrich approach, because people are often scared of getting it wrong
Consequently, Greg believes it is vital to get the message across to young investors as early as possible that investing doesn’t have to be complicated.
Greg adds that there are just four basic rules potential investors need to know:
- Keep some money in savings as a buffer against events such as redundancy – three months’ worth of outgoings is the standard.
- Make the rest of your money sweat. Don’t search for the perfect investment – it doesn’t exist. Just invest your money in a mixed portfolio of bonds and shares. If, over time, you want to adopt a more complex strategy, that’s fine, but don’t sit on cash waiting for the ‘killer’ investment to appear.
- Diversify. Make sure that whatever you get into is diversified, because, as Greg says, “any one investment can go to zero, but a diversified investment won’t”.
- Leave the investment to grow.
Greg argues that investors don’t need a detailed knowledge of finance, or even to follow movements in, for example, interest rates minutely, if they follow these four simple rules. As he says:
It can be really easy to get yourself across the starting line, and I think that message needs to be hammered home.
Time: the great earner
Young people should also learn that they have a huge advantage over older investors, argues Greg:
No matter how much of their money they invest, it’s typically not a very big portion of their total wealth, which is mostly derived from their human capital, i.e., their future earnings power. Younger people can often afford to take the most risk. As Warren Buffett, arguably the world’s most successful investor, says, he is a wealthy man not so much because of what he invested in and the choices he made, but because he has been doing it for a very long time.
Greg adds that while people often associate investing with gambling, they are only partly correct:
Whether you are investing or gambling, you can’t predict what is going to rise or fall. However, you do know the odds are loaded towards the bookie or the casino – in the long run they always win. In investing it’s the other way around. If you choose not to play day after day after day, you will lose as inflation erodes the buying power of your savings. Whereas if you invest, the odds are stacked in your favour in the long run and so the best thing is simply to get going.
Greg believes there is also some practical advice to give younger people who are still anxious about investing. Advisers, he says, could suggest that investors start small and review their progress in six months’ or a year’s time and then, if things are going well, commit more.
There is another way of avoiding the anxiety that some people feel every time they have to decide whether or not to invest money – and that is to take the decision out of their hands. Greg explains:
There are always reasons not to invest, and that can be very costly in the long term. So why not decide that you will invest money whenever your savings pass a certain level? For example, if you have £10,000 in a rainy-day fund, you could decide that you will invest whenever your savings exceed that level. So, if your funds increase to £11,000, you invest £1,000. Or you could simply open a savings plan that automatically invests £100 a month into a diversified investment fund.
Moreover, if the idea of investing today makes a client anxious, then another way of avoiding the emotional barrier is to set a start date in the future, says Greg. If the client has an advisor who can put that plan in motion, that is even better, because the client doesn’t have to pull the trigger.
In conclusion, advisers don’t just need to understand each client’s investment profile; they may also have to understand the various emotional blocks that stop people from investing. Using the methods Greg outlines above can provide a means of kickstarting their investment journey.