How millennials can get rich slowly—really!

A terrific and short read for just about any investor.

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Today’s blog headline (minus the suffix I added) is also the subtitle of a free new investing booklet titled If You Can by William J. Bernstein. This is a terrific and short (16 pages) document that I wholeheartedly recommend be read and absorbed by today’s millennial generation. For that matter, it should be read by just about any investor at any age.

But a warning: if you’re in the financial services industry, you’re not going to like the content. The author is a neurosurgeon who learned the hard way how to invest his own money, and has written a few books along the way. If you’re not in the financial services industry, you may be merely amused by his depiction of most full-service stock brokerages and mutual fund salespeople as the equivalent of “hardened criminals” or “self-deluded monsters.”

At the outset, Bernstein promises to lay out an investment strategy that any 7 year-old could understand and will take just 15 minutes of work per year. Yet he promises it will beat 90% of finance professionals in the long run, but still make you a millionaire over time. The formula will be no surprise to MoneySense readers familiar with the Couch Potato approach to investing in index funds or ETFs. Simply, Bernstein advocates saving 15% of one’s salary starting no later than age 25 into tax-sheltered savings plans (IRA or 401(k) in the U.S., RRSPs or Registered Pension Plans in Canada), and divvying up the money into just three mutual funds: a U.S. total stock market index fund, an international stock market index fund and a U.S. total bond market index fund.

Bernstein a big fan of Vanguard and John Bogle

In Bernstein’s view, the index funds should be supplied by the only financial services company he seems to trust: the Vanguard Group (which sells both index mutual funds and ETFs).

Bernstein is addressing young Americans just embarking on their working careers but the basic idea would apply to Canadian millennials too. Judging by recent Portfolio Makeovers we’ve run showing ETF-based Couch Potato portfolios, the equivalent mix would be 20% each of Canadian, U.S. and international equity index funds or ETFs, and 40% of a bond ETF. And as I’ve written before, don’t even wait till age 25: if you can get your parents to match your savings starting at age 18, the TFSA is the place to put in place these bedrock principals of investing.

And the 15 minutes of work? That would be an annual rebalancing exercise to get the proportions of the three or four funds back to their starting levels.

Millennials can’t count on employer pension plans

Despite this, Bernstein warns younger people that they’ll have a hard go of it because the traditional defined benefit employer pensions of previous generations probably won’t be around much longer. This is pretty much what I wrote in the Editor’s Note for the April issue of MoneySense: that we’re all forced to be our own pension managers these days.

Bernstein says the operative word in his booklet’s title is “If,” because following his simple recipe for wealth (I’d call it financial independence of course) involves a very big “if.” He lays out five hurdles. Number one is excessive spending, second is understanding the basic principles of finance and investing, third is learning and applying market history, fourth is overcoming yourself: the biggest enemy being your face in the mirror; and hurdle five is the conflicted financial industry that is supposedly there to help you with your financial goals. He goes so far as to declare, “The financial services industry wants to make you poor and stupid.” Fighting words, indeed! I might not go that far but it’s certainly a way of looking at the world.

Bernstein’s homework assignments

Bernstein assigns some “homework” to his young readers. They have to read his document twice and read a few books, starting with Thomas Stanley and William Danko’s The Millionaire Next Door and John Bogle’s Common Sense on Mutual Funds. He’s too shrewd to plug his own books but I’ll name one on his behalf that I’ve reviewed positively in the past: The Four Pillars of Investing.

The fact that Bernstein has gone out of his way to give away the booklet should tell you a lot. You can find the link for a PDF here. If you act quickly (today, May 5) you may also be able to get the Kindle version free rather than the 99 cents Amazon.com normally would charge.

To parents of millennials, I’d urge you to download and print this document and hand it over to your kids, perhaps after highlighting the passages you feel to be most relevant. You could give them the link but you know how distracted they tend to be with all the social media noise that abounds these days. Sure, they may say they want to get rich some day but to paraphrase the old saying, “We all want to go to heaven, but no one wants to die first to get there.” For millennials, saving 15% of salary is the financial equivalent of dying, which is why Bernstein titles his document “IF you can.”

5 comments on “How millennials can get rich slowly—really!

  1. This quote “The financial services industry wants to make you poor and stupid.” really resonates with me. For the millennials who are invested, I would not be surprised if the majority of their first investments were made from a visit to the bank and referral to their in house mutual fund salesman or one of the salesman that comes in to the workplace to ‘educate’ employees. The index fund approach seems like a much better solution.

    Reply

    • You better hope the index fund approach is not going to be like the Japanese indices of a 62% drop from 39,000 to 14,500 in 25 years, 1989 versus 2014.

      The Nasdaq index is going on 14 years and is still down 20%. I am sure there are many more examples like this. This does not include 0.50% to 1.00% annual fees charged by index funds.

      Japanese real estate is in the dumper too as well.

      Reply

      • Anybody who held their principle and invested at the crash (no matter how many corrections) still made money bud…..

        Reply

    • A current yielding 4.15%, 25 year provincial strip bond would compound interest totaling 176.36% which is 7.0545% annually. A $100,000 RRSP would grow on average by $7,054.50 interest per year.

      Reply

  2. Currently I’m an unemployed student, but I’ve done my share of working full-time during the summer months in high-school and later felt remorse when I realized my hard-earned money was being spent quickly. It was a great lesson learned that taught me the importance of saving money, budgeting, etc, and soon I ended up being interested in personal finance. So when I read this:

    “For millennials, saving 15% of salary is the financial equivalent of dying, which is why Bernstein titles his document “IF you can.””

    I had to shake my head at my generation, and I hope this isn’t actually true for the majority.
    Unless you’re in the low annual income bracket, saving 15% is nothing. How much do millennials even save if they can’t even put aside a small amount as 15%? A spreadsheet of their finances should be the first thing they look at before thinking they can’t do it (or before they spend big money at a fancy restaurant).

    Reply

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