For kids to grow up to be financially healthy and wealthy, they need to follow the three rules of wealth. They are:
Don’t spend ALL your money
Invest what you save
The second rule ‘invest what you save’ is challenging for a lot of people as they were never taught about investing as they were growing up. This is why I have spent time teaching my kids about investing but also helping other parents. You can find out more about how to teach your kids about the Stock Market here.
Whilst it’s important to understand the basics of investing in the stock market, it’s just as important to know what actions to take once you are invested in the stock market. To help my kids understand the best actions to take when invested in the stock market, I told them this story:
Story - Growing the biggest trees
Many years ago my Grandpa and his friend decided that they wanted to grow their own forest. They didn’t want their forest to be the same as everyone elses. They wanted to have the biggest trees they could possibly grow.
The problem was, they didn’t know anything about growing trees.
Should they cut off broken branches over time? Should they give their trees any special food? Should they check on their trees every day?
There were so many different things they could do but didn’t know which actions would really help their trees grow.
Grandpa and his friend decided to go and find the biggest trees in the whole of the land. They would then find the people who grew those trees to find out what they did to make their trees grow so tall.
After searching for many days they found a very impressive tree. It was significantly bigger than all those around it. They were determined to find out who grew the tree. As they stood admiring the tree, a man walking his dog walked past. “Excuse me, do you know who this tree belongs to?” my Grandpa’s friend asked. The man replied “It belongs to Mr Robinson, sadly he passed away over 7 years ago!”.
My grandpa and his friend were disappointed not to be able to find out Mr Robinson's secrets. They decided to go find another large tree.
The search continued
After a few more days they came across another large tree. It wasn’t quite as big as the late Mr Robinson’s tree but it was impressive. Again, as they admired the tree they stopped a passer-by to ask who the tree belonged to. The passer-by said they believed it belonged to Ms Ridley who owned the village bakery. They went to the bakery to speak with Ms Ridley to find out her secrets.
They got to the bakery and as it was a cold day ordered a hot chocolate and iced bun. As Ms Ridley handed them their drinks and buns, they asked her about her tree.
“My tree? What tree?” Replied Ms Ridley.
“We were told that the tree on the hill belongs to you!” Grandpa explained.
“Oh yes, I completely forgot that I planted a tree there many years ago. I haven’t been there for many years. Why do you want to talk to me about that tree?”
They explained that they wanted to know her secrets but given she didn’t even remember she had a tree, they weren't going to learn much. They thanked her for the drink and buns and went on to find another tree.
Despite that the first two people were no help at all, they were determined to continue their search to find the secrets to growing the largest tree.
Still no luck!
As they continued their search, they came across the most impressive tree they had ever seen. It was so much higher than the other two and all the other trees nearby. They both hoped they would be able to find the owner of the tree and learn their secrets.
As they looked for people to ask about who owned the tree, they went to the nearby village. The local police officer informed them that the tree belonged to Mr Lazy who lived just a few doors from where they were standing. Excited to hopefully find the secrets to growing the largest trees, they ran to Mr Lazy’s house.
They knocked on the door but there was no answer. They tried again but no answer. They were going to give up but knocked one last time. They heard “What do you want?” from the other side of the door. “We want to ask you about your tree!” replied the friends.
“OK, let yourselves in, the door is open, I don’t want to get out of my chair!”
The friends walked in.
“We are so pleased to meet you Mr Lazy. We are so glad that you’re not dead and you know the tree is yours!”
Mr Lazy was shocked as it’s not every day that someone gets so excited that you’re not dead.
“You know my name isn’t really Mr Lazy, that’s just what people in the village call me!”
“Sorry. We just want to ask you about your secrets to how you managed to grow your tree so big. Would you be happy to share with us as we want to be able to grow our trees as big.”
“OK but this will be quick” replied Mr Lazy. “When I started growing my tree, I planned to look after it as best as possible, I even bought special tree food as I saw that’s what Ms Patel was giving to her tree. However, when I was about to give the food to my tree, a TV special came on and I completely forgot about the tree."
"Then, a few weeks later, there were rumors of a large storm coming. Some people in the village tried to protect their trees by cutting some of the tree branches off so their trees would be stronger. I was going to do the same but I was in the middle of a great sleep and it was cold outside. It turned out the storm never came so my tree was fine."
"Then when a storm did come a couple of years ago, it took the top of my tree right off. I was going to do the same thing as Mr Daniels and make sure that it didn’t get even worse. A lot of people thought the storm could continue and the trees would be damaged forever. They decided to chop their trees so at least they would have some wood. I was going to do the same but I had just eaten a large meal and couldn’t get the energy to get out of my chair. Luckily the storm passed and the tree started to grow again and the loose branches got stronger.”
Grandpa was shocked.“Are you telling us that whilst everyone around you was going out to look after their trees, you stayed at home and did nothing the whole time?!”
“Yep - that’s my secret!”
Finding the secret
The two friends were so angry that Mr Lazy had wasted their time.
As they walked to find another big tree, my Grandpa’s friend said “We aren’t having much luck at all! Everyone we’ve spoken to hasn’t provided us with any secrets to growing a large tree. Essentially, they’ve all done absolutely nothing!”
“That’s it!” Exclaimed Grandpa “The secret to growing the biggest trees is to do nothing!”
We’ve been looking for actions to take but it’s those that ‘do nothing’ and leave their trees alone that have the biggest tree. They do nothing no matter if a storm is coming or not. That’s what we should do with our trees! Absolutely nothing!”
This is what they did and how they grew their forest. Even when the storms were blowing the tops off their trees, they remembered the people they had met and did nothing. They sat back and soon enough their trees kept growing and growing.
“Who would have guessed that the best strategy is also the simplest!”
The real-life version
This story is actually based on what many say happened at Fidelity. Fidelity wanted to find out what type of investor had produced the best returns over the last ten years. They carried out an internal review. They found the people who performed the best in terms of investment returns and contacted them to find out what they did. Most of them had either died or forgot they had an investment account, i.e. they did absolutely nothing!
So many people miss out on making more money investing as they take action. They get excited when markets go up or, worse still, get scared when markets fall (a storm). These actions cause them to miss out on the best returns over the long-term.
There is actually data to support this. The stock market in the US returned 6.7%* pa. This means that just investing and doing nothing would have got that return. What most people achieved was much lower due to taking action. In fact, the average investor only got 3.7% (pa).
What’s the best investment strategy?
If you want your kids to grow up financially healthy and wealthy, then teach them to save a bit of money and help them invest that money.
The best investment strategy is:
Invest in the stock market.
Ideally top-up how much you invest each month.
Then do nothing and reap the rewards.
Don’t get me wrong, when the headlines are talking about the stock market it can feel scary. 2020 showed us how those that got scared and sold their investments when the stock market fell in February and March lost out on the recovery return later in the year. They now have a lot less money compared to those that did nothing.
If you do invest (and don't take action) on behalf of your kids, you’ll be able to say to them as they grow up ‘we achieved this by doing nothing, make sure you do the same when this money is yours’.
If you aren’t investing yet, then take the time to learn. You’ll be surprised how simple it is. To learn more, here is a link to some common questions.
Thank you for reading!
* Based on investors in S&P 500 (US market) index mutual funds from 2008 to 2018.