My Generation

Bill Parrott |

I love The Who and "My Generation" is one of my favorite songs. Rolling Stone magazine considers it one of the greatest songs ever – number 11 out of 500.[1] The song was released fifty-five years ago, and it has been going strong ever since—a classic. Despite being an oldie, it's still relevant today.

My investment career has spanned more than three decades. A benefit of longevity is that I get to work with generations of investors. During this recent downturn, I had several clients contact me about establishing investment accounts for their children. These kids are in their teens and early twenties. In one case, we created accounts for the fourth generation of family members by opening 529 college education accounts. I love it when young people begin investing.

One benefit of starting your investment strategy when you're young is time. The longer you allow your investments to grow, the better. A majority of Warren Buffett's wealth came after the age of 65. He started investing at age 11. According to Dave Ramsey's Financial Peace University, if Jack invests $2,400 every year from age 21 to 30 and stops, he will accumulate $2.5 million by age 67. If Blake waits until age 30, and he invests $2,400 every year for 38 years, his account will grow to $1.48 million. Despite investing more money for longer, Blake fell about $1 million short of Jack.[2]

Here are a few ideas if you want to help your children or grandchildren build an investment portfolio.

Start small. Small companies historically outpace large companies. And, small companies eventually grow into large ones. According to Dimensional Fund Advisors, small companies produced an average annual return of 13.8% for the past 40 years, while large companies averaged 11.8%.[3] Apple is the largest company in the world measured by its market capitalization, but it once was a small company.

Buy individual stocks. A popular theme on Wall Street is to buy what you know. If you own an iPhone, buy Apple. If you wear Nike shoes, buy Nike. You can buy shares in any company you want. The advantage of this strategy is you can control what you own. The disadvantage is the lack of diversification and potential cost. For example, Amazon sells for more than $3,250 per share!

Buy mutual funds. A mutual fund will allow you to invest a small dollar amount into a fund of your choice - $25, $50, etc. The mutual fund manager will invest your dollars alongside other shareholders to buy several different companies. A mutual fund is also a great way to establish a monthly investment program. A disadvantage of a mutual fund is you won't have any control over what you own. A mutual fund, for most, is the best choice for new investors, regardless of age.

Open a Roth. If you're working, you can open a Roth IRA. A Roth allows your money to grow tax-free for decades. You can contribute $6,000 per year or 100% of your salary, whichever is less. If you buy and sell stocks inside a Roth, you do not have to pay capital gains taxes. When my daughter started working a few summers ago, we contributed 100% of her salary to her Roth.

Open a brokerage account. A taxable brokerage account will allow you to access your money at any time, for any reason - college, a new car, a trip, a house, and so on. The IRS will treat your trading activity as a capital gain or loss.

Slice and dice. Investment firms like T.D. Ameritrade, Schwab, and Robinhood allow you to buy and sell stocks and Exchange-Traded Funds (ETFs) without commissions. These companies may offer partial share trading, or slices, as well. For example, I mentioned Amazon trades for $3,250. If a firm allows for partial share trading, you can invest $100 in Amazon.

Keep your fees low. In addition to commission-free trading, keep your mutual fund fees low. All funds have operating expense ratios (OER), so read the small print. The lower the OER, the more money you get to keep. Index funds typically have low fees relative to other types of mutual funds.

Embrace volatility. Stocks fluctuate – daily. If your stock or fund drops, use it as an opportunity to buy more shares. Apple stock is up 1,300% over the past decade; however, it fell 40% in 2012, 25% in 2016, 32% in 2018, and 26% in 2020.[4] Don't fear down days. Long-term wealth is created during the depths of a bear market.

Concentrate. Concentrate your investment holdings to a few companies or funds. Find a few great investment ideas and invest heavily in them.

Diversify. As your account grows, take some profits to buy more companies. For example, if you invest in a company and it doubles, sell half and purchase another stock.

Set goals. Why are you investing? How do you plan to use the money? Writing down your investment goals will make you a better investor. It can also help you to stay invested during market downturns.

Read. Your secret weapon to finding great investment ideas is reading. Here are a few of my favorite investment books.

  • One Up on Wall Street – Peter Lynch
  • The Only Investment Guide You'll Ever Need – Andrew Tobias
  • The Wealthy Barber – David Chilton
  • How to Make Money in Stocks – William J. O'Neil
  • The Millionaire Next Door – Thomas Stanley
  • Everyday Millionaires – Chris Hogan  

Review. Analyzing your investments will make you a better investor. Winners are great, but we can learn much by analyzing our losers.

Investing is a long-term journey, so be patient. My recommendation is to grow rich slowly. If you think generationally, it will allow you to ignore the daily fluctuations in the market and let your money grow over time. If you pursue risky, short-term gains, you may become frustrated and potentially give up on investing. Don't be greedy.

Good habits formed at youth make all the difference. ~ Aristotle

August 21, 2020


Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is T.D. Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren't suitable for every investor.











[2] Financial Peace University workbook, Jack & Blake, pages 62 & 63

[3] DFA 2020 Matrix Book

[4] YCharts