The Unused Asset of Young Investors

Success for Younger Americans

Paul Winkler: I like to do all kinds of things here on the show, but I thought this was interesting. In The Wall Street Journal, they were talking about why success is quieter for younger Americans. And they were talking about younger adults, how they’re handling finances and money, and I thought that was fascinating.

They’re saying that they’re redefining success and shifting their focus from wealth to health. This has been in the news; people have been talking about what’s going on in New York right now, and that’s all the political news, it’s all anybody can talk about right now, for good reason.

But anyway, it says that the young people don’t care about money. They don’t necessarily care about getting rich or status either. But it was interesting because the article contradicted itself to some extent.

They were actually saying that they actually do, but they’re much, much more balanced than maybe previous generations were. And what’s happening is they’re looking at success as not just monetary, but time spent with family and those types of things. And it made me think a lot about growing up.

We’re coming up on the Fourth of July. I naturally tend to think about my parents at that point in time anyway because my dad was military. And the time that we would spend together that was most impactful was where we’d go out and camping. We’d camp every August and literally go out there for a week, two weeks, and just nothing but that.

The thing that got me on this one was we got to talking about this, and I’ve been talking about this with my son, and we’ve been talking about younger people, and the thing that I’m trying to do with this radio show more and more these days is try to reach younger people. Because often, we don’t think about the fact that we’re going to get older, that we are going to have our bodies break down. We’re not going to be able to do things that we used to do.

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There are two phases in life that we go through. Number one is we work for money, and number two is where money works for us. 

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And the idea is to put a little bit away for the future and make sure that I have something that will earn money for me in the future. You think about it this way: If I take some of the money that I earn and I say, “Hey, I don’t need this as income today,” and this gets into the pre-tax versus post-tax thing that I’ve been talking about here, if I put some money away from the future and I say, “Don’t tax me at that marginal rate, that 20% rate or 22% rate, 24% rate up to 37% rate, give that money to me down the road 30 to 40 years, then at that point I’ll pay taxes.”

The Hourglass of Life

But because we’ve always had some level of income that people earn that there’s no taxes on whatsoever, and if we can do that, that would be a tax-smart way of doing things. But it’s also a smart way of doing things in general because we forget when we’re in our 20s and our 30s and our 40s that our priorities will change when we’re older.

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Priorities change when we’re in our 60s and 70s and all of a sudden recognize that we don’t have all the time in the world and that it’s an hourglass.

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I was talking to somebody about this this week and I said, “I’m very, very conscious of the hourglass.” Kind of the way I look at things is there’s an amount of sand that’s going through it, and how much is in the top versus in the bottom? You got a lot in the top when you’re younger, in the top section of the hourglass, but little by little it ends up down in the bottom and you don’t have much in the top.

And it’s that time when you don’t have much in the top part of the hourglass that you’re starting to go, “Well, what else do I want to do? Where do I want to go? What do I want to see? Who do I want to spend time with?

“What things do I want to accomplish? What things are really important to me?” And that is the idea behind putting a little bit away.

So there’s a balance. You can say, “Hey, we can focus too much on money and not enough on health,” but sometimes we can focus too much on our free time or mental health and that type of thing that they’re talking about here, having lots of free time, doing the things we want to do, at the expense of planning for the future. And there’s always that balance.

What’s the Balance?

What is that balance? Well, we know the studies show that if we look at how much income we ought to be putting away for the future, studies show that people that are wealthy, typically 10, 15, 20% of income is what they put away.

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So you just act like you make 10, 15, 20% less than you do. 

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And I often find that people that are lower income go, “I just can’t afford to do it.” And I’ll say, “Well, the reality of it is that you can think about your income as, well, what if I make $30,000? Well, what if I actually act like I make 27? Will it make that big of a difference in my lifestyle?”

That’d be just 10% less, right? Would it make that big of a difference? And the answer for most people is no, it wouldn’t make a huge difference.

So you put something away for the future because quite often what happens is people get to their 50s and their 60s and they get up in a catch-up mode and they start doing really dumb things with their money. They start making really dumb mistakes. And the dumb mistakes are typically because they’re scared, they get panicky, and then they start to do things that are more speculative at that point in time.

And as much as I’ve picked on younger people for getting into some things that I don’t think are very good investments — I think that they’re not investments — quite often I see it with older people too. And I see them engage in types of investing activity.

They’re more aggressive than they should be or they’re investing in ways that maybe they can hit the lottery. Individual stocks, for example.

And I’ve been doing that recently where I’ve been taking the people that have recommended individual stocks on TV and I’ve been pointing out how one week they tell you to buy this stock and the next week they tell you, “No, I never would’ve sold that or never would’ve bought that stock.” Or one week they tell you to sell something, and the next week they tell you, “You never should have sold that stock,” when the stock does the opposite. And most people will recognize that their golden gift doesn’t exist, that they don’t have the ability to get the right companies or they don’t have the ability to get higher returns than what markets do.

Managing Index Funds

I attended a workshop this week that was really good. I’ll probably talk about it sometime during the course of the show.

And this guy was actually talking about indexing because people think, Well, just buy the index funds. And one of the studies actually showed that investors are managing index funds.

Now, an index fund is a fund that just tracks a section of the market like the S&P 500 or small companies, the Russell 2000 or the Russell 2000 Value or the Russell 1000 Value or the EAFE, the Europe, Australia, Far East. They track certain segments of the market.

And what we’re finding in the research is that people are actually managing those things more actively than they manage individual stocks. It’s just become the new individual stock, ETFs, that track the entire market.

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Instead of just timing and stock picking, just picking a particular stock, they’re timing the entire market, which is pretty dysfunctional.

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But you think, Well, why are they doing it? And the reason comes down to, “I can’t afford to lose. I want to protect myself from risk, so I’ll sell before the market goes down.”

Which seems pretty logical. It seems reasonable, right?

Or what they’ll do is they will go, “Hey, you know what? I think that things are going to be really good. I like the person in the White House,” let’s say, or, “I like what’s happening right now in tech or AI,” or, “I like what’s going on when it comes to …”

There’s an oil stock this week — that was one of the things out there. There was another company out there that was computer chips, and it was almost comical.

The guy on TV that was talking about this computer chip company, he had the most giddy look on his face and it was silly. It was hard to watch.

He just got this look on his face like, “Oh my goodness, they’re going to get this lady. Look at this. Hey, you guys hit it out of the park this quarter and look, your actual returns were better than they thought they were going to be.”

And I’m sitting here watching him going, the body language tells me that this particular guy had made a recommendation for this stock at some point in the not-so-far past, had made a recommendation, and he was giddy beyond all belief that he had actually gotten one right. And this is literally one of these guys that gets it wrong so often that even his co-hosts on TV actually point out and go, “You messed that one up.”

And this is what people do with their finances. So younger people have the opportunity to not get this wrong.

Studies show that if you look at the past 30 to 40 years, the average investor, and in asset allocation funds, investing between stocks, bonds, and cash, gets a lower rate of return than the inflation rate or a rate of return that’s around the inflation rate. It’s like 35-year data.

What’s going on? And a lot of this comes down to this behavior, period.

Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.