If there is just one piece of investment wisdom you can share with your children, then it must be to start investing in equities as early as possible. There is no easier way to invest: you can start by simply investing in a general equity fund, or even in a broad equity index that represents the biggest companies in the world. Time will also negate any risk you might have due to volatility. Even if some companies go under, the broader average will provide you with the necessary returns. The longer your time horizon, the lower your risk. You don’t have to know anything about equities or investing because the intrinsic properties of equities will do all the work. Why equities you might ask? The main reason is because when you invest in equities, you invest in the drive, ambition, talent and ingenuity of humans, unlike something like cash where there is only an interest that can be earned and no capital growth.
There are two forces that work for you when investing in equities: the superior average return on the asset class and the benefit of compounding returns. Regarding the superior return, this is where the risk lies when you haven’t got the time. There are lots of uncertainty when it comes to the performance of a share, owing to the subjective nature of valuations. At any given time, some people might think the company is cheap and at the same time some people might think it is expensive. It is only after a period of time that the fundamental fair value of the company is revealed. The power of compounding is a mathematical certainty. You earn growth on growth. It is like the doubling of a grain of rice on a chess board. If you start with one grain on the first square and then double it on the second, if you keep doubling, you will have 9.22 quintillion grains on the 64th square.
We can talk about all the other essentials when it comes to successful investing later, but the first step is to start early. Everything gets more complicated the longer you wait. It is like almost everything out there: prevention is better than cure; it is easier to stay fit than to get fit; and all the rest. As the saying goes, help JWR to help you and start early!