Invest Early and Wisely

Matt: 00:00

Welcome to real financial planning broadcast on WKXL and available wherever you get podcasts. I'm Matt Robison, joined as always by Mike Morton, the host of financial planning for entrepreneurs, the proprietor of Morton financial advice, Mike, welcome back.

Mike: 00:17

Hey, Matt, it's always great to be here. Especially summertime, it's been awesome.

Matt: 00:22

Summertime is supposed to be relaxing, it is kind of relaxing, it's a workout to relax and it keeps going. It's not like when you were a kid, it was like, you get three months off, which is one of the reasons that we don't lead the world in educational attainment anymore. Hey, speaking of younger people...

Mike: 00:38

I think you should get more months off in the summer. I think more people should have more time off in the summer. So in fact, shout out to my small business owners out there try to craft a way where you can take more time in the summer.

Matt: 00:51

So you're saying start your small business in France, just saying that could be the opportunity that matches...

Mike: 00:56

Are you telling me I should be moving to France? then I could watch the Tour live.

Matt: 01:00

That's the way it goes. That's the way it goes. You get five weeks of paid vacation anyway, we're way off top. You know, I didn't want to start about young people. But there are a significant number of young people right now who are enjoying a bit of a summer break. And you know, their minds are not particularly focused on serious stuff. But you want to drag your attention onto some serious stuff for just a few minutes stirring this pot. Why?

Mike: 01:30

Yeah, not necessarily drag their minds, oh, that'd be great. You can send this episode to your favorite teenager or young adult. But it's also the listeners of this podcast. And on the radio could be any number of people. But I'm sure there's somebody in your life, who is you know, approaching teenage years teenage or young adult. And so that's what this episode is for. Because really, the younger, you can get started with saving and investing, the better off you're going to be. And we told this story before that Warren Buffett wouldn't be a household name, if he hadn't been investing for over eight decades. Alright, he started as a 12 year old and he's now in his 90s still invested. And if he had stopped, like most people that want their summers back, maybe stop working at age 65. Like, you know what, I'm kind of I'm done. I've saved enough. You would not know Warren Buffett's name. It's the longevity of investing. And so that's why I wanted to create this episode and easy go to Episode for those teenagers or young adults can do in terms of simple implementation of saving and investing that they will look back in five or 10 or 20 years, when they finally wrap their head around like oh, yeah, this is the thing. Oh, my gosh, look at this headstart since I got started when I was young.

Matt: 02:45

Now for our listeners who are getting a sense of familiarity, a certain deja vu, yes, it is a glitch of the matrix. Yes, we all work for super intelligent machines. Yes, we are all doomed. But in addition to that, I think very explicitly, you were telling me before we got on the air that you know we've touched on some of the pieces of this before, but you kind of want to wrap it all together very specifically.

Mike: 03:13

Well look, there's only so many topics around financial planning, especially for the audience that that we're trying to reach. So in this instance, yeah, that's exactly right. I was chatting with a good friend of mine who actually helped me with this podcast. And he was like, oh yeah, you know, I've listened to a whole bunch of the podcasts. I know, we talked about this before but I’m getting ready to open up, you know, an investment account and get started, what should I do? And I was like, well, we talked about this, like in every episode, what you should be doing, I really wanted to break it down, make it super simple for all the big parents out there. Or if you got a niece or a nephew for this on to or grandchild or whoever it is, to make it really simple on the steps you can do to how to get started. And then we can talk about, you know why those are important and other stuff around that.

Matt: 03:59

Alright, so if you're listening on the radio, then just you know, this is your opportunity to start subscribing to a podcast, because this is going to be your one stop shop. So check out financial planning for entrepreneurs, or capital close up, you'll find this episode in there. And this will be your easy go to. All right. So you have a teenager or young adult in your life, or maybe you are such a person, where do you start?

Mike: 04:28

Yeah, here's what I want you to do if you have some earned income. All right, open up a Roth IRA. All right. And then inside of that, then you're gonna put some money into that Roth IRA, some savings, some long term savings into there, or maybe an aunt and uncle or parent is going to put some money into that Roth IRA. Again, you need earned income, open a Roth IRA and invest it into a total stock market fund. And you can call me up in 20 years and thank me later!

Matt: 05:00

Alright, that's it. So this has been financial planning for entrepreneurs, this is the government document, is it really just that simple?

Mike: 05:07

Of course, there's nuance as with anything, but here's the deal with earned income. So let's think of those teenagers, young adults, just getting your first job. And you now have an income, maybe you're mowing lawns, getting some earned income, maybe you've got you know, you're working in the kitchen, or a waiter or waitress, you got some earned income, you can take up to that amount of income, hey, I made $2,000. This summer, we're going to open up a Roth IRA, I'm going to contribute $2,000, then I'm going to log in, and I'm going to purchase a total US stock market fund with the $2,000. And yes, that's what you want to do. Now, one other quick point, if you are a minority, you know, a minor, excuse me, if you are a minor, you can't open a Roth IRA directly. Okay, so bestowal account, if you're a minor, so get your parents to help you open up a Roth IRA. But that's it, man, I would just keep it that simple.

Matt: 06:04

So why a Roth IRA. And again, I gotta give the disclaimer, we've done a whole episode about Roth IRAs, the magic of Roth IRAs, you're a big fan, but just give me like the nutshell version for a minute, why is that the best starting place for young investors?

Mike: 06:21

Okay, so you're gonna save $1,000 for the future spending, you decide, I'm not going to need this $1,000. So that $1,000 is going to grow to by the time you retire, 40 years from now, it's going to grow to $100,000. So it's grown from $1,000 to $100,000. Okay, in 40 years, then you decide you want to spend 100,000, you're going to sell out of that fund, and spend your 100,000, oh wait, the government's gonna want some of that growth, any increase in your net worth, a lot of times the government wants a piece of that. Okay, so you invested $1,000, you sell $100,000 stock, and the government wants, say, $20,000 from you. If you had that in a Roth IRA, that $1,000 in a Roth IRA, all $100,000 will be yours.

Matt: 07:13

Well, and that's, again and this goes back to a principle that you've mentioned on the show before, which is pay your taxes when your rate is low. And so presumably, when you're doing that summer job, you're early in your career, now is the best time to pay those taxes, because you're paying less, and then you get the full benefit later on, when presumably, you'll be in a higher bracket.

Mike: 07:37

Yeah, it's not just that too, most people will be just traditional versus Roth IRA. I'm not gonna go into all of that. But this is just saving it somewhere. So you can set up a RobinHood account with just a regular brokerage or checking account, instead of saving it there. Save in a Roth IRA. That's the big takeaway. So you're a young person, you're a teenager, you're in your 20s, Roth IRAs, max them out, if you can.

Matt: 08:03

Just to be clear, again, you're talking about in terms of where you put this money, once you open the account, you're talking about it going into a low cost, stock index fund.

Mike: 08:15

Yeah, now let's talk about that. So this is part two. So you have two things to do. You need to open up a Roth IRA. Again, if you're under the age of 21, in some states, it needs to be a custodial account. Okay, but open up a Roth IRA, contribute money, I guess it's three steps, contribute money to the Roth IRA, and then invest that money. So where do you invest that money? It's going to be your next question, right? The answer is, there's a variety of places, this is not financial advice, even though that might be the title of the podcast is my financial advice. But here's what I recommend you might take a look at is a total US stock market fund. Okay? It's all the public companies in the US 3500 or so different companies. You can get one from Vanguard, that's a ticker symbol VTI, okay, is one of these products. So super low cost index fund, and you want to be 100% invested in the stock market? No cash, no bonds 100% in the stock market, if you're again, teenager, young adults money in and invested in the stock market.

Matt: 09:23

And any variation on that? What if you want to be the next Warren Buffett? And you're like, alright, I want to go for the gusto here. I mean, people amp up the risk. Is that worth it this age?

Mike: 09:34

Yeah, there's different things that you can do. So there's two comments, one I often recommend, this is asset classes. I told you total US stock market. So you only invested in US companies, you're invested in all of them. The other thing you could do is get a little bit riskier, and invest in small cap value stocks. These are the smaller companies in the US, and then they're also broken into the value. Why do I recommend this for young people? Because of the increase in value over time, there is more risk. But there's a lot more reward, it is the asset class that has the best growth potential historically speaking, okay. And really, when we're talking 30, 40, 50 year time horizons, then any 40 year time horizon in the past, historically, it has outperformed the total market, it has been the best asset class, you're still diversified across 1,000s of companies. So you're not taking a risk of like your money going to zero. And when you get a 40 year time horizon, the risk really disappeared. So a lot of times we think about risk, all right, in one year, it could be almost a coin flip is my stock going up or down, it could really be kind of a coin flip in that sense. But when you're talking 5 years, 10 years, 40 years, then the stock market is undoubtedly in my opinion, the place to be so small cap value stock would be something like the Vanguard US value stock, or iShares Aslan, there's different ones, you can get different ticker symbols, but small cap value, low cost index fund…

Matt: 11:08

The whole idea of small cap index funds just choked me up there. So is there, I know I get very emotional about this stuff. Speaking of getting very emotional about this, this has been kind of an emotional time. If you've heard anything about the stock market, what you've mostly heard is, in a word ‘bad’ it sounds the last few months bad in like a stock market. And one thing that I learned in my years in politics is that people pick up on these things a little bit. Sometimes you get dribs and drabs in the news, because people are busy living their lives. Plus, it's summer, you know, and if you're talking about a young person, maybe a young person who's on her way off to college or on an internship, you're just focused on other stuff. So I could just hear listeners catching this episode and saying, wait a second, stock market bad right now, why on earth do I want to do this? What kind of a financial adviser are you Mike? Are you like, evil? What's going on? And does this go back to the point you were making a few weeks ago about like, yes, the stock market is down. But that also could be an opportunity, because you could be getting stocks at a discount from a long term perspective.

Mike: 12:23

Absolutely. So when you're a young person, or anybody, and now I'm going to use young in all the way up to maybe you and I Matt which will grant that face. If you are not spending your investment money, the money you're putting aside today, if you're not spending it for another 10 years, or more, okay, then you want things to go down, you want to buy more things, when they're on sale, let's load up while stuff is on sale. So especially teens, 20s 30s, you want the stock market to crash my friend, because then you just get to buy more of it. Remember that the stock market is a capitalist machine, that you have companies making products that we love to buy, alright, so we're gonna keep having companies creating products and services that we love to buy, the cheaper we can buy their future sales, the better it is, okay. So if they're high now, then they're not going to go up that much over the next 10 or 20 years. If they're lower now, then they're going to go up a lot more in the next 10 or 20 years. So yeah, every time is a great time for purchasing stocks, when you have that long time horizon. And now as you know, another one of those examples.

Matt: 13:38

Just to put a finer point on this past performance is not necessarily an indicator of future results, which as we've discussed on this show before, I think is laughable, because what else are you going to base your indications future results on, like, you know, but historically, the percent returns over 40 years are quite astonishing. You gave the numerical example before, but in percent terms, they're pretty robust.

Mike: 14:08

Let me give you a couple of I don't want to throw out too many numbers on the podcast and on the radio waves. But I do want to mention a couple of things, the past performance and future results. What's funny about that, too, is the more things go down now, or in general, just at any time, you know that two thousand.com crash the financial crisis and nine like, the more it goes down, in other words, the cheaper the stock market, the better the future returns. So you can look at that inverted graph, right? The cheaper things are, the better the future returns. So to say that past performance has no indication of future results… Yeah, it's kind of laughable in that sense. Like yeah, there are patterns to certain things. Now you can't predict them and you can't time them one year, five years, stuff like that. But there are general patterns, you know, over time and what else are you going to base your investments on anyway. So getting back to the risk question I said in one year, it's kind of a coin flip, is it going to go up or down in the next 12 months? No one has any idea. Alright, so a one year return for the total stock market has fluctuated between negative 35% to positive 35%. Alright, so the worst one year would be going down 35%. And the best one year is going up 35%. These are approximate numbers so it's that coin flip. But when you take it out to 40 years, what's the best 40 year period? And what's the worst possible 40 year period in historical perspective? So looking in the last 120 years, every 40 year period, what's the best and worst? Well, the worst was a 9% annual return. And the best was a 12 ½%. So now look at the window from 9% to 12 ½ % are rolling 40 year periods. So my guess, yeah, the next 40 years, most likely to be somewhere in there could be a variation, it could be as low as 8% a year could be as high as 13% a year, it could be an outlier. But it's probably going to be somewhere in there if we're going to go on those historical results. So again, the risk one year could be up or down drastically, over 40 years. That's why I believe the stock market is the place to be.

Are you ready to create your ideal lifestyle? Let's discover what's most important to you and design a plan to have more of that in your life. Go to meetmikemorton.com. All one word. meetmikemorton.com.

Matt: 16:21

Should people be using apps, you mentioned RobinHood before you know anything else they should really be doing to get this going?

Mike: 16:30

Well, there's certainly a lot of other ways of teaching investing to young people. And we've talked about that in some other episodes. I do like Robin Hood for that for just teaching. What is investing all about? Why don't you put a couple hundred dollars into a company, see what happens. The reason I like this method is because you're going to learn a lot about yourself, and you're going to make mistakes, when the stakes are low, you're going to put in a few hundred bucks and watch it get cut in half in six months. And you're going to learn a real lesson because those couple hundred bucks means a lot to a 17 year old. And so that will help them avoid putting in which I've seen, you know, $50,000 in something, and that gets cut in half, that starts hurting a lot more. So yeah, you can just make sure you go in with why you're doing this, again, the Roth IRAs for the long term, buy a low cost index fund, let it ride forever, but you can use other apps and trading to teach other lessons.

Matt: 17:27

And I guess the final question is I could just hear people with a young person in their life or if you're a young person yourself saying, alright, this all sounds well and good. But I still got to go to college. I have to save for that. How am I supposed to put away $1,000 bucks now, when I've got this looming expense? I mean, you're still saying, you just got to do the math. And believe me, your future self will thank you.

Mike: 17:51

Well, there's always competing ideas for your dollars. And what I'm saying is get started as soon as you can, with a Roth IRA putting as much as possible into it. And for parents and grandparents and aunts and uncles listening out there, if you can, this is a great way of helping out young kids by helping them get a real head start on their future savings.

Matt: 18:13

Mike Morton Morton financial advice. Thanks so much.

Mike: 18:17

Thanks. Thanks for joining us on financial planning for entrepreneurs. If you liked what you heard, please subscribe to and rate the podcast on Apple, iTunes, Google Play Spotify, or wherever you get your podcasts. You can connect with me at LinkedIn for Morton financial advice.com. I'd love to get your feedback. If you have a comment or question, please email me at financial planning . Until next time, thanks for tuning in. This recording is for informational purposes only and should not be considered for investment advice. Opinions expressed as our of the date of recording. Opinions are subject to change. We do not guarantee the accuracy or completeness of the data presented here.