I made my first real investment in the markets around age 22. I was fresh out of college, newly married and had gotten my first “real job,” which happened to be in the financial industry. I knew little, but I knew enough to know that an early start was going to be to my advantage many years down the road. So I opened a Roth IRA and put a few thousand dollars into a fund I probably picked at random, given how little I knew about investing at the time.
But that money was the seed to fund our retirement savings. As I learned more about investing the makeup of that Roth IRA changed to the relatively aggressive mix of index funds it is today. But I never tapped that money, despite buying two houses and having two kids and quitting my job to start this firm.
Why? Good planning (and, admittedly, a healthy helping of good luck not related to the markets). Before money went into an investment account, we had liquid savings in a reserve for emergencies and expected expenses. The money that went into my Roth IRA had a purpose – retirement. I could afford to be (and still can) very aggressive with that investment because it has a long term horizon. In fact, those early dollars in my Roth IRA probably have a 70 year time horizon or longer from the time of the investment. It’s fairly likely that my 2 and 4 year old daughters will inherit at least some of the money in that retirement account, extending the total time horizon quite a bit.
Good planning means that money intended for a long term time horizon can have one. Let me acknowledge that there is a difference between time horizons of a person’s total balance sheet and money invested for retirement/financial independence. Does your emergency fund have a long-term time horizon? No. Money that you’re saving for your first house? No. Kid’s college funds? Maybe, sort of, for a while. Money you save to build and growth wealth to eventually be financially independent? Yes. Some of this “total balance sheet” discussion is largely impacted by your financial goals, priorities and the size of your balance sheet. Just out of college, most of your liquid assets are going to be in cash (if they’re not being used to pay down debt). If you’re young and planning on big life changes like a new house or starting a business, your balance sheet is probably more conservative than it “should be” as described by overly simplified rules of thumb.
The key here is planning. I keep saying planning because how are you investing if you’re not planning? What is this money for? You can’t just be throwing money willy-nilly at the markets without asking these questions first. Whenever someone asks me “I have some extra money left at the end of every month, what should I do with it?” My answer is always a question: “What is this money for?” Maybe it’s getting completely out of debt. Maybe it’s saving for little Jimmy’s college. Maybe it’s moving to a bigger house. But if you can’t tell me, it’s pretty hard to give advice about investing. You need to have a goal in mind, and you need to have the bases covered for short-term needs before you can talk about having a long-term time horizon.
But when you do invest for the long term, you can think about the long term. I’m not going to touch my retirement savings. I’m 31 years old! Of course I’m not going to touch it. It’s going to sit there, and I’m not going to worry about what the market does next year or for the next five years. My only thought is what those investments can do for the next 30 to 50 years, and if history is any guide, my globally diversified low-cost portfolio is going to be just fine.