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.
The booklet is available permanently for free in .pdf format on Bernstein’s site “Efficient Frontier”:
http://efficientfrontier.com/ef/0adhoc/2books.htm
As an aside, he is not updating his online journal these days, but past issues are a gold mine of interesting reading – and since most things in finance are timeless, still relevant today:
http://www.efficientfrontier.com/ef/index.shtml
Love this! Always looking to add new reading material, this post alone has given me at least a few weeks worth :)
Thanks Dan!
Steve – Great info, but I think it defeats the purpose of the ‘free for a limited time’ offer – get people to read it NOW!
Thanks for sharing Dan.
Always good to read new books and material.
Mark
Thanks Dan! Sharing this (via your blog) with all my friends.
It might be worth noting the Canadian versions of various US acronyms, like an IRA is basically an RRSP, and a Roth IRA is basically a TFSA.
@Nathan: Good point: for young investors the US references might be confusing. We should also note that a 401(k) is comparably to an employer-sponsored RRSP.
Great response from my friends so far. Sparked a somewhat lively conversation about investing. I also recommended your Moneysense guide when one friend asked if there were any similarly easy to read books from a Canadian perspective. Kudos to you and to Bill Bernstein.
@Nathan: Many thanks, and glad this got people talking. It’s good to see that more and more people are starting to understand that successful in personal finance has almost nothing to do with stock picking and market forecasts. Still a long way to go, however, and the industry will do everything it can to protect its turf.
Dan writes: “You don’t need to make investing a hobby….” However….
Partly as a result of this blog, investing has become a hobby for me. I am a big nerd and I enjoy reading the articles here and even the reader comments. I have my own modest portfolio, but what I have enjoyed most is making RESP contributions for my nephews and investing the money in a broadly-diversified portfolio of index ETFs. I follow the markets every day and this blog daily — out of interest, not need. I have no plans to become an “active trader.” Each time I make a new contribution, I must decide whether to augment previous positions or to purchase a new market segment. So far, they have Canadian and American stocks, bonds, an REIT ETF and a small new investment in foreign stocks. It is a delight to watch the distributions roll in.
I get far more of a thrill and excitement out of my nephews’ conservative “watching paint dry”-style portfolio then I would from a new car or fancy clothes, so I consider it money well spent.
I will look up the “Four Pillars.” Any further book recommendations for die-hard nerds who actually enjoy this subject matter?
@Danny: Love the comment! Obviously all of us here enjoy investing as something of a hobby, too. It’s only a problem when the hobby leads people to tinker, trade or otherwise screw up what would have been a perfectly good plan.
My Resources page lists more of my favourite books. The Gone Fishin’ Portfolio and All About Asset Allocation remain two my favourites.
https://canadiancouchpotato.com/resources/
I think #5 is great advice. I just started investing last year with a modest amount of money ( under 30k). Each and every person I talked to would try and sell my funds with MER’s of over 2.5% or so. Each promised great returns etc etc. I was overwhelmed with conflicting information, until I found this site and I started to make sense of it all. I have a plan now and I stick to it knowing that I am making a smart informed choices as opposed to blinding handing my money over to someone who’s sole purpose is to make money off of me.
@ Danny:
As further book recommendations you can’t go wrong with a little history, if only to appreciate how investing basics are eternal and only the details change over time:
“Devil Take the Hindmost: A History of Financial Speculation” by Edward Chancellor
“Against the Gods: The Remarkable Story of Risk” by Peter Bernstein
And for a quick read that will have you laughing out loud (and leave you a good deal wiser about how the financial services industry works):
“Where are the Customers’ Yachts?” by Fred Schwed (first published in 1940 and, sadly but not surprisingly, still relevant today)
To all the young investors out there, follow the advice in #1 above– start small and make it automatic, have a set amount come out of your chequing account, or even better your paycheque each pay and have it automatically invested into your RRSP.
I started out like that years ago and am happy to say that I have saved quite a bit over the years. My only regret is that I did not know about the couch potato portfolio sooner, spent many years in overpriced mutual funds instead. Thanks to Dan and all the other readers, there is lots of helpful advice here to help you on the way.
I would have to agree with Steve. “Where are the customer’s yachts?” is one of my favourites.
Hi Dan,,
I am done reading! I read this site,MilTeacher, Common sense….., and some other blogs.
Now i want to take plunge but some last minute Qs!! I am very clear now about TD-e from which bank perspective,but i am not clear whether any other portals are good for me or not as well.
i have some savings and i want to put about $40(20+20) for me and wife’s tfsa.
please le me know if i shall try something else and not TDe. I am also willing to take your flat fee services if i fit bill.
I also got 30k in rdsp for son with bmo, shall i move that to td-e??
Just to clarify this is just opinion request, I am responsible for all decisions. Thanks a lot :)
@Eemjay: If you are investing five-figure amounts, the TD e-Series funds are certainly worth a look. The best way to access them is through TD Direct Investing (the discount brokerage). You can open an account by visiting a bank branch, but I would suggest not telling them you want to use the e-Series funds or they will try to talk you out of it. :)
LOVE the comment – “Beware of the financial services industry”
Great post! It’d be interesting to see the main recommendations of “If You Can” re-written in a Canadian point of view, with strategies regarding TFSA’s as well as a guidance regarding this 1/3rd mix recommended in the book:
US Total stock market index fund
International total stock market index fund
US total bond market index fund
Where do I start? I am 18, and starting university in a few months. I want to invest and I have started a few books on passive (index) investing. I have looked at TD e-series funds, and that is where I am leaning. I want to invest long term, but have access to my money coming out of University (in 4-5 years). I am still learning about finance and investing and working on understanding basic principles.
The traditional split of 60% stocks with 40% bonds is appealing to me. Once I get into these indices, is there any fixed term I must stay invested for?
Probably a basic, “stupid” question. But again, I ask to learn.
@Kay: First off, kudos to you for getting started with saving investing before you even enter university! Before you open an account, however, it’s important to understand a fundamental idea. You mention that “I want to invest long term, but have access to my money coming out of University (in 4-5 years).” These goals are, unfortunately, not compatible. If you expect to need your money in less than five years, then you really can’t invest it in stock and bond funds like the TD e-Series. Both can potentially lose value over short periods, even four or five years.
Short-term investments (and five years is certainly short-term) should be in something safe, such as a ladder of GICs. Yes, the returns are low, but your priority with short-term investing is not high returns, it’s safety of principal. Once you graduate and start saving for retirement (with a time horizon of several decades) then you can start to think about stocks and bonds. Good luck!
I have often been told that the most valuable asset I have at this age is time, which is why I would like to start early. I will not likely need all of my money out of these funds coming out of school. I was thinking it would be wise to put a percentage of what I have into an Index fund, or something of the sort. That must be better than letting it sit in a chequing account for years.
I do have a direct investment account with TD, though I have not made any investments yet. I have worked for the past two years, so I would like to modestly say that I do have more money saved up than the average 18 year old.
My questions to the world are:
What would be an appropriate amount of time to hold a Index fund for to maximize return?
What is the minimum amount recommended to start investing in an index fund?
What are some alternative investment vehicles that I should consider?
Forgot to mention, thanks for all the help!
@Kay: Maybe the solution is simply to earmark some of your savings for long-term investing (in stock and bond index funds) and a separate portion for more immediate needs (GICs and high-interest savings accounts).
– What would be an appropriate amount of time to hold a Index fund for to maximize return?
The longer you hold, the higher your expected total return would be. It’s more appropriate to think of the minimum time horizon for a portfolio of stocks and bonds. I’d say about 7 to 10 years.
– What is the minimum amount recommended to start investing in an index fund?
You can start with any amount if you use the Tangerine Investment Funds. With the TD e-Series you need $25,000 or you’ll pay an annual account fee.
– What are some alternative investment vehicles that I should consider?
I’d suggest sticking to the basics for now. ETFs might be appropriate in the future when your portfolio is much larger, but not yet.
This post may be helpful:
https://canadiancouchpotato.com/2012/03/05/some-advice-for-new-potatoes/
Hi Dan: Just want to double-check something you said re: TD e-series in your comment above.
“With the TD e-Series you need $25,000 or you’ll pay an annual account fee.”
Is this true if you are a TD customer or is it only the case for those who had to open a brokerage account to access e-series funds?I am a TD customer and I have two TD e-series account and never came across mention of an annual fee. One of the accounts is over 25 but the other one isn’t. Trying googling but didn’t find mention of a fee. (In fact, I found this article, which says there are no fees: http://www.moneysense.ca/invest/become-a-couch-potato-investor-with-less-than-5000).
Would like to know if I am likely to be slapped with a fee for the one account (though I hope they are treated as consolidated) :(…
Correction: the article doesn’t say there are no fees (that was re: Tangerine) — but it doesn’t mention fees. I should have read more carefully the first time!
@MJ: TD Direct Investing has a $100 annual fee on RRSPs under $25,000. However, you can open a “Basic RSP” for just $25 year is you only want access to mutual funds (including the e-Series) GICs and bonds, but not ETFs or stocks. See page 6 of this fee schedule:
http://www.tdwaterhouse.ca/document/PDF/forms/521778.pdf
Awesome read. Being in my early twenties I think this read was very worthwhile. Here’s another blog post I think goes along well with your post:
https://champion.ca/2015/06/15/7-ways-create-wealth/
this is a great thread, informative as alwayse.
im in my 20’s and am planning to passivly invest with e-series funds however i cant wrap my head around which type of account i should invest in.
should i use an rrsp and reap the tax sheltered compounding benefits but face the music when im forced to start withdrawing at 72.
or should i start a non registered account so im in control, but forgoe the tax sheltered rrsp.
I poboably wont have a pension, but i make a decent income and i save large sums every month whci i plan on contributing to my investments.
(i also have a tfsa which is nearly maxed out, that im thinking will be gics and short term investments.)
i hear arguements for both sides. your opinion would be much apprecieated.
thanks amus
@Amus: Unless you are in the lowest tax bracket today (and you’ve suggested you’re not) it is very unlikely that a non-registered account would be preferable to an RRSP. This is especially true if you make a point of investing your RRSP tax refund as well (as opposed to simply spending it). The tax consequences of RRSPs in retirement are real, but they are often overstated, usually by retirees who benefitted from decades of tax refunds and tax deferral and now are surprised to learn that the RRSP was never meant to be lifelong tax avoidance scheme.
Don’t ignore the behavioural benefit of saving with an RRSP: people are much less likely to raid their retirement savings than they are to spend money in a non-registered account.
This is really helpful advice. I’ve just downloaded Bernstein’s book, so hopefully that will get me on the right track. Unfortunately, I found your website a day too late…
I’m in my mid-20s, out of school with no debt. I make a good salary, but I’m only on a contract so my salary for the rest of the year is less certain. I’ve saved about $20,000 and decided to fill my TFSA’s annual limit by purchasing $5,500 in mutual funds at TD. The adviser suggested something less risky, the Comfort Balanced (70% fixed, 30% equities), since I might want to take this money out in 5-10 years to buy a home. I also decided to open an RSP for long-term saving and bought $1000 in their Comfort Balanced Growth portfolio (40% fixed, 60% equities). I’ll be making monthly contributions to both of less than $100.
I really only had a limited understanding of the MER when I bought these portfolios yesterday. The fee seemed lower than other ones I’d seen at 1.7%… and I hadn’t heard anything about the bad reputation of mutual funds. – my parents have mutual funds, so I just assumed this is what you do with your money.
I don’t want to invest all of my minimal savings, so I’m not really sure what to so. I can sell both portfolios in 3 months without penalty, but I might lose money given the economy right now. I still only have a limited understanding of ETFs. Can you recommend any course or action or further reading? I don’t have the time or knowledge to actively manage my own fund, but I don’t want to miss out on potential gains by throwing my money at useless advisers.
Thanks!
@Tegan: At this stage of your investing, ETFs are not appropriate. The balanced funds you’re in now may not be ideal in terms of cost, but you will not be able to switch to the lower-cost e-Series funds unless you move to a DIY strategy. Costs are always important, but for now your ability to save is going to dwarf any small differences in MER. Remember, a 1% MER on $5,500 is $4.58 per month. Costs become a much bigger issue as your portfolio grows larger, and by that time you may feel a little more comfortable investing on your own.
https://canadiancouchpotato.com/2012/03/05/some-advice-for-new-potatoes/
You may also want to check out some of the books in my Resources section:
https://canadiancouchpotato.com/resources/
Thanks for your response!
I really see the value in higher contributions after reading your advice for new investors. This seems like a very good strategy for me since I’ve historically been a good saver. Seeing as I’m probably not ready for the hands-on nature of ETFs, would you recommend I pull out of my balanced funds altogether and just save? I’m worried that my savings will depreciate in a regular savings account, but my adviser wasn’t very transparent about my options outside of mutual funds.
He also told me the MER is only applied to the potential returns, not my investment. I figured this meant I would only pay if the fund made a return. Did I misunderstand?
@Tegan: I don’t think you should stop investing and just put a money in a savings account. The idea is simply that you don’t need to optimize your investments just yet: that can come later once you have developed your good savings habits and you become a little more comfortable with investing.
As for the MER being applied only if the fund earns a positive return, this is absolutely untrue. Fees are payable regardless of the fund’s performance. So if the fund has a 1% fee and it has a -5% return before fees, you will earn -6%.
This is definitely my category: under 50k to invest, very little investment knowledge. However, after having done some research and understanding that I fall into this ‘simple DIY’ category, what would the benefit be in going with Tangerine funds vs. indexed investments with Wealthsimple? Tangerine seems pricey in comparison, especially with the Wealthsimple ‘no charge’ under 5k. Interested in your knowledgable take..
Hey Canadian Couch Potato, thanks for a great read. Those are five things we should definitely all keep in mind.
One thing that I particularly relate to is this:
“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.”
If you look at some of the “greats” in the world of investing (Buffett, Munger, Lynch, Graham, Soros, etc.), a lot of them were contrarian investors and would definitely relate to the quote above. I don’t think that’s a coincidence.
Do you ever find it difficult to stick to an investment when the whole secular world is telling you it’s garbage? A colleague of mine was invested in Bank of America through the financial crisis. Obviously he got crushed, but hearing the stories of how everyone around him told him to get out was really interesting, since he thought the fundamentals of BoA were still worth investing in.
FC
This is great advice. It’s true, I see many young investors who want to make money really quickly and don’t have the patience for safe returns. It seems the weed market has been a big win for many young investors trying to make some quick bucks though.