Last night I had the chance to meet ten young people aged 12 to 21 as part of a financial training at our offices. In fact, we offer a few years a course on the basics of finance and investment for children and grandchildren of our customers.
It is an exercise that I find very rewarding and I am always amazed at the interest of the young for the financial and economic world in general. I must also admit that it is astonishing to note that the vast majority of our young people know very little or no basic concepts of finance and investment. What are our schools to teach basic principles of economics and investment in our youth? This deficiency of curriculum explains a little why we deemed useful to our modest share in the financial education of our young people with the training.
But precisely what are the main principles of finance and investment that our young people should assimilate? The question is not simple, because the financial world is vast and complex. Here are all the same four basic concepts we are trying to convey in these training sessions:
- It starts with savings. No savings, no investments. The definition of investment is renouncing immediate consumption in order to be able to consume more later. When I started in finance, I read the book "The Richest Man in Babylon" by George S. Clayson, whose main message always followed me: "Pay yourself before others." We should adopt the discipline of saving (to pay ourselves) at least 10% of our revenues from our youth. Then, and only then, comes the need to invest those savings wisely.
- The magic of compound interest. Anyone who understands the principle of compound interest automatically includes several key aspects of the investment. First, there is no point to rush to get rich, we must let time do its work. The young people I've had the chance to meet yesterday an almost unfair advantage over the vast majority of investors - their age and time. Second, long-term performance obtained. Due to the phenomenon of compound interest, a small performance difference will make a huge difference in your long-term wealth. For example, for the same investment, the investor who achieved a compound annual return of 8% will end after fifty years with a nest egg 2.5 times more than the investor who has obtained a yield of 6%. We thus understand the importance of minimizing costs, starting with the management fee, but not forgetting the commission of transaction fees and taxes.
- Inflation. The phenomenon of the general increase in prices of goods and services is also closely linked to investment. If we give up immediate consumption, for example, buying a first car, to invest $ 5000, we want to ensure that this money will allow us to buy a car at least equivalent in five or ten years. Because it is likely that the price of this car will have increased by at least 10% in five years, or nearly 25% in ten years. The goal of any investor should be to obtain a return at least equal to inflation. Otherwise, much buy this car right away.
- The yield is associated with the level of risk. I sincerely believe that this concept of finance base is misunderstood or at least frequently forgotten many investors. There is no free pass right, what Americans call a "free lunch" investment. Secured or very low-risk investments offer very low yields (to convince you, ask your bank what rates it offers to a guaranteed investment certificate) while the riskier investment vehicles offer the potential for higher returns : shares in Exchange for example, have provided a historical annual compound return of nearly 10% in the long term, but they are also notoriously volatile and regularly experience periods of declines.
I either can not help but believe that the major financial scandals in which too many investors lost their retirement funds have been avoided if more of them had better understood this principle when it promises you high returns without risk, be skeptical. This violates the principle that there is no blank check and that what seems too good to be true in the world of investing is often a trap investors.
Our government fumbles by not initiating our young people the basics of finance and investment. In addition, the virtual disappearance of defined benefit pension plans requires that our children take care more of their retirement funds. With this blog and training we offer, we try to make our modest contribution. Education as investment, think long term. The cost of this deficiency in our youth could be very heavy for the society of tomorrow.
No comments: