Allan Roth thinks kids can teach adults something about investing.
The key to wise investing really comes down to simplicity, says the DU adjunct professor and author of How a Second Grader Beats Wall Street (Wiley, 2009). Roth’s book follows the story of his son Kevin, who learned simple investing approaches from his father and then created a successful investment portfolio.
“Investing is so simple any 8-year-old can do it but so emotional it’s hard for adults to do it,” Roth explains. “[The book] is not about a brilliant kid; it’s about simple lessons you learn when you’re 8 years old. At that age, money is more abstract; money is a candy bar.”
The simple things kids learn should be a lesson for adults. For example, if there is a kid in your class who is not trustworthy, would you lend him your money or toys? So, why should an adult get or accept a loan from people that don’t have a prayer of paying it back?
Then there’s basic arithmetic.
“The very first thing you learn is 10 minus two equals eight,” Roth says. “Whatever the stock market returns minus what we pay in fees is what the investor gets back.”
What Roth means (and explains to Kevin) is that in order to see money grow, the average investor pays Wall Street 2 percent. When Kevin asked what these “helpers” do to deserve 2 percent, Allan responded, “nothing.”
“I then explained to him that we always have to pay something to invest, but we could cut that 2 percent down to .2 percent,” Roth writes.
Roth is adamant that investors don’t need to pay 2 percent to Wall Street. Kevin was already beating the system because of paying lower rates and hence, getting higher returns.
Roth, who teaches an investment and a behavioral finance course at DU, has been working in the investment world for 25 years. He writes a column for CBS MoneyWatch.com and is the founder of Wealth Logic LLC, an investment advisory and financial planning firm.
“The human nature wants to get rich fast,” Roth says, explaining that people don’t necessarily want to work for it, either. Too often, investors get caught up in what the “experts” are telling investors to do. But if there really was an expert who knew how to beat Wall Street, he wouldn’t be out in the media dishing out free advice, Roth says. Instead, he’d be a billionaire.
“We grown-ups tend to make things difficult; I like to tell people to keep it simple, stupid,” he says.
But investors can still save a little room for fun.
Stocks like BP or Apple are examples of volatile and trendy stocks, respectively.
“They can be entertaining, but they can also be very harmful,” Roth explains. “But life’s got to be a little fun. The future of my family shouldn’t depend on these [stocks], but it’s fun and an example of a gamble.”
Other simple tips for any investor:
- Don’t overcomplicate. If you can’t explain your investment strategy, you might be in trouble.
- Dare to be dull. If you are a small investor, consider CDs, bonds and money markets.
- Buy low and sell high — not the other way around.
- Avoid buying just what’s hot and trendy.
- Remember the saying “Don’t put all your eggs in one basket.”
- Keep in mind that something can always go wrong.
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