When I first became interested in indexing, someone recommended William Bernstein’s The Four Pillars of Investing. Originally published in 2002, the book has become a classic for its insight and wisdom, and for Bernstein’s entertaining, no-nonsense style.
But as much as I loved Four Pillars, the 330-page tome wouldn’t be my top pick for a teen or twentysomething who is just getting started. Fortunately, young investors can now begin with a more inviting volume. Bernstein has just released a brief e-book called If You Can: How Millennials Can Get Rich Slowly, available in Kindle format from Amazon for $0.99. And for the next day or so, you can download it for free.
If You Can reveals what Bernstein calls the Five Horsemen of the Personal Finance Apocalypse: the hurdles young people will need to overcome if they are to become successful investors. (The latter four are the same pillars Bernstein wrote about in his earlier book.) At the end of each section, he makes a recommendation for further reading. Here’s a summary of his advice to the millennial generation.
1. You need to save more. Unless you spend less than you earn and save the difference your investment strategy is irrelevant. Bernstein suggests you save at least 15% of your income—a tall order, to be sure—and start by maxing out any employer matching program.
His suggested reading here is The Millionaire Next Door, by Thomas Stanley and William Danko, which “dissects the corrosive effects of our consumer-oriented society.” I would add Andrew Hallam’s Millionaire Teacher, which has a similar message, followed up with specific investing ideas.
2. Understand the theory of finance. You don’t need to make investing your hobby (actually, you probably shouldn’t) but everyone needs to understand the fundamental trade-off: “If you want high returns, you’re going to occasionally have to endure ferocious losses with equanimity, and if you want safety, you’re going to have to endure low returns.”
Bernstein’s recommended book on this topic is John Bogle’s Common Sense on Mutual Funds. That would be a good choice for those inclined to read a 657-page doorstop, but my own recommendation would be to start with Bogle’s much shorter The Little Book of Common Sense Investing.
3. Learn your financial history. If you’ve ever found yourself thinking “this time it’s different,” then you don’t understand the history of markets. One of Bernstein’s insights is that Generation Y tends to place huge value on recommendations from friends and social media. “When all your friends are enthusiastic about stocks (or real estate, or any other investment), perhaps you shouldn’t be, and when they respond negatively to your investment strategy, that’s likely a good sign.”
His homework assignment covers the euphoria and despondency that have always been part of investing: Edward Chancellor’s Devil Take the Hindmost, a history of financial speculation, and Benjamin Roth’s The Great Depression: A Diary.
4. Confront the enemy in the mirror. Humans are “pattern-seeking primates,” Bernstein says, which means we get distracted by randomness and short-term performance. We’re also “comically overconfident” in just about everything we do. Unless we can learn to recognize and overcome our own psychology, we can’t hope to be successful investors.
Jason Zweig’s Your Money and Your Brain is the go-to book on this topic: “I can guarantee that you’ll enjoy it immensely, and if Jason can’t save you from yourself, then no one can.” I’ll add Why Smart People Make Big Money Mistakes by Gary Belsky and Thomas Gilovich.
5. Beware the financial services industry. This is always a difficult one when you’re giving advice to young investors. On one hand, most people simply lack the skill and discipline to invest on their own. But investors (especially young and naive ones) will have an extraordinarily difficult time finding unbiased advice at a reasonable cost. Bernstein’s suggestion? “Act as if every broker, insurance salesman, mutual fund salesperson, and financial advisor you encounter is a hardened criminal.”
That’s not particularly helpful, especially since Bernstein himself has written elsewhere that “I have come to the sad conclusion that only a tiny minority will ever succeed in managing their money even tolerably well.” My own recommendation for Generation Y: get started with a simple DIY solution like the Tangerine Investment Funds and don’t start looking for an advisor until you have about $100,000 to invest. By the time you get to that stage you will likely have cleared all of the other hurdles Bernstein describes.