My Investment Letter: Words of Advice for My Grandchildren

by Charles D. Ellis

My Investment Letter: Words Of Advice For My Grandchildren Splash image

One of the great joys of my life is seeing my four young grandchildren growing up: learning to crawl and then walk, learning to talk and read stories, learning to ride bikes and play computer games—learning in all directions how to do all sorts of things. Of course, they want to do all these things well: It’s more fun and wins praise.

It is way too early for my grandchildren, all under 10, to learn what they’ll need to know—and will want to know—about how to be successful at investing. But that time is surely coming, and being successful in investing will be very important.

After 50 fascinating years of working closely with nearly 100 investing organizations, knowing many of the world’s most effective and successful investment managers, teaching the advanced investment courses at both Yale and Harvard, writing over a dozen books and serving on 14 different investment committees, I’ve received a remarkable and treasured education in investing: theory and concepts, professional “best practices” and the realities of investing’s history.

In this article


About the author

Charles D. Ellis Ph.D., CFA, founded Greenwich Associates international strategy consulting firm in 1972. He now serves as an investing consultant to large institutional investors, government organizations and wealthy families. His latest book is “The Index Revolution” (John Wiley & Sons, 2016).
Charles D. Ellis Profile
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Having enjoyed this remarkable learning opportunity, I’d certainly like to share my understanding of investing with my adorable grandchildren. But, by the time they’ll be really interested in learning about investing—in, say, 20 years—I may no longer be around. So what can I do?

I decided to write an investment letter to my grandchildren. I knew it should be brief so reading it would not be a chore. While “timeless” may sound a bit highfalutin, my message certainly should not be dated or too tied to one specific time or era. It should be appropriate for my grandchildren to use at any time and in any economy or any stock and bond market.

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Since my grandchildren will probably open my letter when they are in their twenties—when they will have another 50 or 60 or even 70 years to live and invest—the letter should focus on truly long-term investing. Finally, since the chances are that they will not make their careers as professional investors, my letter should assume that my grandchildren will be consumers, not producers, of investment services.

Since most people don’t like getting advice unless they ask for it, each grandchild’s letter is in an envelope with his or her name on it and this sentence: “Please open only if and when you have decided you’d like to get some ideas about your investing from your loving grandfather.” Inside each envelope is my letter.

The Letter to My Grandchildren

Dear Jade (or Morgan or Ray or Charles),

You decided to open this letter hoping to get some ideas about investing that you’ll find useful and helpful. Naturally, in writing up these ideas for you, that’s my hope too. So in writing this letter, my rule has been KISS – Keep It Short ’n’ Simple.

You probably know that investing can be complicated, so this could have been a very long letter. (If you ever want a longer explanation of how to succeed in investing, you can always read my “Elements of Investing: Easy Lessons for Every Investor” [updated edition, John Wiley and Sons, 2013] or “Winning the Loser’s Game" [6th edition, McGraw-Hill, 2013], which has sold over 500,000 copies.)

Two suggestions: If, after reading the letter, you decide you’re not yet all that interested in thinking seriously about saving and investing, put the letter back in the envelope and reopen it in about five years. If you’re still not very interested, retain the valuable services of a professional investment adviser to guide you as you make your own decisions.

If you decide you are seriously interested in learning about investing, keep a diary of your investment decisions: what you expect of each investment when you make it and, later on, how the results compare to your original expectations. Like a videotape of tennis or skiing, this objective feedback will help you learn—both more and faster—how to do your best in investing. (As in driving, the secret to success is simply not making big mistakes.)

12 Investment Guidelines

Here are 12 investment guidelines to consider. Naturally, I hope you’ll find each of them useful.

1. Since you’ll be investing for many years—you’ll continue investing for at least 50 years—invest always for the very long term. Over the long term, the highest average returns are achieved with stocks. So, except for a modest “in case of emergencies” savings fund, concentrate your investing in stocks. (Before investing in bonds, give serious consideration to #11 below.)

2. Since nobody can know which companies and stocks will do “better,” always diversify your investments widely. An important reality explains why: “Better” in investing really means better than expected by the full-time professional investors who have superb information and now dominate the stock market and set all the prices. (As I write this in 2013, professional investors do over 95% of all NYSE trading, up extraordinarily from less than 10% 50 years ago.)

As my friend Burt Malkiel [author of bestselling “A Random Walk Down Wall Street” (10th edition, W.W. Norton & Company, 2012) and co-author of “Elements of Investing,” a two-hour read that covers all the basics] so wisely says, “Diversification is the only free lunch in investing.”

3. When observing the short-term behavior of the stock market, ignore the day-to-day and the week-to-week price gyrations and news reports. Concentrate instead on longer-term averages or norms. Just as when buying a home, you would ignore thunderstorms or a heat-wave—the daily weather—but would think carefully about the area’s overall climate, always take a long-term view.

Remember that when stock prices go down that’s actually good news for long-term investors, because you can buy more shares with the same dollars.

Also remember that Mr. Market—a colorful, tricky rascal—is always trying to capture your attention and get you excited or upset so he can trick you into buying or selling by moving stock prices around. Don’t let him ever interfere with your steady focus on the discipline and serious work of building long-term investment value.

4. Minimize trading to minimize costs and taxes. Never make an investment you don’t expect to stay with for at least 10 years, and hope to stay with for 25 years. If you invest this way, you’ll not only save on taxes and trading costs, you’ll teach yourself to make better investment decisions before you act. That’s why Warren Buffett suggests we all limit our lifetime investment decisions to 10, so we’ll oblige ourselves to make more careful, thoughtful, long-term choices whenever we do take action.

5. Consider low-cost indexing very carefully. By reliably and consistently delivering the market rate of return with broad diversification and very low turnover (and so incurring low costs and taxes), index funds outperform a substantial majority of all mutual funds with similar objectives (i.e., growth, value, small cap, international, etc.) Those who know the most about investing agree that index funds are best for most investors. (Always check the fees to be sure you invest in low-cost funds.)

6. Beware of fees. They may look low, but they are actually very high when looked at realistically. Yes, most investors innocently describe mutual fund fees with one four-letter word and one number, but both word and number are wrong! Conventionally, we say mutual fund fees are “only” (the four-letter word) 1% (the number). But 1% of what? Your assets! Since you already have your assets, you are paying for something else: a return on your assets.

So, calculated as a percent of returns, that 1% of assets is closer to 15% of returns (if the consensus expectation of 7% returns holds). That 15% is a lot more than 1%—and nobody would say “only” 15%. But even 15% would be misleading.

As we all learned in Economics 101, every price should be compared to the price of every alternative good or service to reveal the incremental price of each alternative compared to its incremental value. (That’s what smart shoppers do at the grocery store and what savvy diners do when studying a menu or a wine list.)

So, the incremental fees for an actively managed mutual fund relative to its incremental returns should always be compared to the fees for a comparable index fund relative to its returns. When you do this, you’ll quickly see that that the incremental fees for active management are really, really high—on average, over 100% of incremental returns!

7. While the past does not guarantee the future, understanding investment history is certainly the best way to understand how best to invest. So here are a few of the lessons of history:

  • Index funds achieve higher long-term returns than most actively managed funds, particularly after fees and taxes.
  • Index fund fees are less than 1/10th as much as the fees of actively managed funds.
  • Index funds incur much lower taxes.
  • While index funds will never have “beat the market” results, they avoid the bane of active management: underperformance.
  • Unlike active managers, index funds reliably and consistently achieve their investment objective—every day, every month, every year, and every decade.

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So please consider indexing carefully for all or most of your investments.

8. Active investment management is always “interesting,” and in the short run, can be exciting—or painful. But be careful, because so many brilliant, imaginative, hard-working, extraordinarily well-informed, full-time professionals have flooded into investing institutions all over the world and are now competing with all the others all the time. So it cannot be surprising that their collective best judgments—while necessarily imperfect—have become so good that by the millennium, two major changes were evident to careful observers. It had become difficult for any active manager to beat the market over the longer term and, equally daunting, it had become virtually impossible to figure out in advance which individual active managers would be the lucky ones that would beat the market.

9. Fortunately for you, finding managers who would beat the market—which used to be many investors’ goal when markets and investing were so different back in the 1960s and 1970s—is not nearly as important for your long-term investing success as knowing yourself.

What really matters most is figuring out—often best done with a professional investment adviser—the long-term investment program that is best suited to you: your financial resources, your spending objectives, your time-horizon and your ability to stay the course. Remember always that for long-term investment success, you are more important by far than the stock market and more important than active managers. So take the time to “know thyself” financially. Once you have done this well, your other decisions will be much easier to make and your decisions will be better matched to your true objectives.

10. Most investors who do not succeed have made at least one—and sometimes all—of three “classic” mistakes. Please be sure to avoid all three.

Trying to beat the market. Some folks do beat the market each year, but usually only because they got lucky. (While most patrons at gambling casinos lose, there are “lucky winners” every day, which keeps the gamblers coming.) Most investors who try to beat the market fail and, if honest with themselves, wish they had never tried. Besides, you’ll have many much better things to do with your time than chasing after will-of-the-wisp “investment opportunities.”

Borrowing on margin to really beat the market—and then getting caught short. Leverage works both ways. So be careful.

Buying after stocks have gone way up, particularly buying the stocks that are up the most, or selling at the bottom after stocks have gone way down and converting a temporary loss into a permanent loss.

11. Try always to see the whole picture when you make financial decisions. For example, your salary or earned income—with its predictable cash payments for your knowledge capital—will be similar to interest income from owning bonds when you lend your financial capital, or savings. What this means in a whole picture view of your financial situation can be surprisingly important.

If interest rates are 5%, the equivalent market value of your knowledge capital would be 20 times what you get paid in salary. So, if you earn $100,000, that part of your knowledge capital financial whole picture would be a lot like the income from owning $2,000,000 in bonds. Recognizing this reality, you may decide that also holding substantial investments in bonds—often recommended for portfolio balance—does not make much sense when you are less than 50. (When you’re approaching retirement, you may want to replace all or part of your salary income gradually with income from bonds, particularly if market price fluctuations cause you serious distress.)

12. Saving is always the first step toward investing. Time is important too. In combination, time and saving—compounding—can be very powerful.

Sensible investing lets money make money for you. Here’s an example. The amazing Rule of 72 tells you for any interest rate how many years it will take to double your money. At 8%, it takes nine years; at 10%, it takes 7.2 years; and at 3%, it takes 24 years to double—and the same number of years to double again, and so on. So if you save $5 today and invest it at 6%, in 12 years, it will be $10; in 24 years, $20; and in 36 years, $40. So when you save $5, try to remember that it wants to be $40 that you can spend in the future (after, of course, adjusting for inflation).

Indexing Is a Lot Like Flying

My father in-law was an expert U.S. Navy pilot. He was an Annapolis all-American athlete, commander of the USS John F. Kennedy when it was the world’s most powerful warship, a two-star admiral and the world record-holder for one of the most dangerous actions in naval air: landing a fighter—bomber—on a carrier…at sea…at night!

In all his flying career, Admiral Koch never had an accident. I fly a lot too: 10 overseas trips a year and dozens of domestic flights. My record is perfect too: no accidents in over 60 years of flying. So, we both have been safe flyers.

But my flying is a lot like indexing: very deliberate, reliable, safe, no excitement (dull, really), no important skills required of me, and (on a cost per mile basis) low cost. All I need to do is decide where and when I want to go, make a reservation, get to the airport on time, check in, go to the right gate, sit in the right seat, and buckle the seatbelt.

While the highly skilled and well-trained pilot and crew are doing all the work, I’ve got better things to do with my time—like writing this letter to you with the hope that you’ll find these ideas about investing useful to you as you decide how you will design and manage your investment program for success over the very long term.

Your loving grandfather, Charley

Advice I Wish I Had

Any grandmother or grandfather reading my letter will understand exactly how I chose my 12 investment guidelines, and they’d be right. The guidelines are what I most wish I’d been given when I started out 50 years ago. If I’d only known—and, of course, used—these guidelines, I’d have avoided some costly mistakes.

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Fortunately for me, my fortunate education in investing taught me enough great lessons soon enough that I was able to enjoy many years of investing success.

Not everyone will be so lucky, so they will need professional help—not on beating the market, but on defining and sensibly solving their own unique investment problem.

Charles D. Ellis Ph.D., CFA, founded Greenwich Associates international strategy consulting firm in 1972. He now serves as an investing consultant to large institutional investors, government organizations and wealthy families. His latest book is “The Index Revolution” (John Wiley & Sons, 2016).


Max Hinchman from CA posted over 3 years ago:

I concur! It sure would have been nice to have had a bit of this insight and guidance 50 years ago. And, perhaps, I would not have had quite the financial losses that occurred.

Thanks for the "letter".

Ronald Engelsman from SD posted over 3 years ago:

Fifty years ago you would have had a very difficult time finding a good index fund.

Also, many of these comparisons of the performance an individual investor in common stocks achieves vs. an investor in index funds do not account the formers ability to take much better advantage of tax laws (e.g., donating shares of highly appreciated stocks to charity, reaping tax losses on certain positions etc.).

It's commonly accepted that portfolio rebalancing is a useful tactic. However, there are far better and far more opportunities to do this with individual stocks in a portfolio than with a few index funds in a portfolio.

Fred Warner from CT posted over 3 years ago:

Obviously Dr. Ellis is good at what he does, far better than most amateurs. I spent my life as a professional archaeologist and consider myself better trained and more productive than, again, most amateurs. In no way does that denigrate weekend archaeologists; it merely says that archaeology is my profession. My problem with the now generally accepted theory that index funds are the best thing going is that I think there is a better way. There are fund managers who are very good doing what they do professionally. Why not take advantage of their expertise? If a fund manager can return an annual l5-20% for a period of 10 years or more does that not demonstrate enough expertise to let him take the additional 1% or so? I watched my Latin America fund give me those returns for years, not watching it daily but certainly selling all of it after a year of disappointing returns. True, the funds I invest in are at the upper end of the risk scale but, with occasional checking in, they seem to do better than the market, which I understand is what index funds are tied to. It is a total mystery to me why people invest in funds that don't "beat the market"; there are enough no load funds that do.

W Worth from WA posted over 3 years ago:

The "harvesting" of losses for a tax benefit against gain is an important step for individuals. Capturing of gains are important also. My rule is any gain exceeding 30% "annualized" is a trade. Therefore any such gain is captured regardless of the period held for the security. I also own significant index funds which are held as Dr. Ellis posits.

Vaidy Bala from AB posted over 3 years ago:

As an individual retired investor, it is my opinion one invests 80% in long term stocks and 20% in fast growing stocks both based on sound fundamental and technical analyses. It is easier to teach children graphical method as they learn statistics to understand market movements, reminding a picture is worth 1000 pages of text, boring!

Walter Stoddard from CO posted over 3 years ago:

My belief and one that I intend to write in a letter to my kids and grand kids is the importance of stock selection and long term investing. Choosing stocks for long term holdings that have a long history of returning or growing assets for shareholders or newer companies that make products or provide services that provide real value to the public. It is these companies that one can buy and simply hold forever and that over 30 years of growing dividend payments combined with stock splits can turn a $10K investment into a $5 million investment. There's numerous examples of such companies out there and there's no reason to believe that the success we've had over these last 35 years will not continue in the future with those companies that provide necessary services & value and that have a mind set of returning value to shareholders.

George Sandvig from CA posted over 3 years ago:

As 35 year investor who has tried almost every strategy available, I made a copy of Mr. Ellis's letter and gave it to my Son. It is my opinion people that fancy themselves as stock pickers have not tracked their true returns due to their losses. Its like people who go to Vegas and just tell you about the times they won big. If 75% of professionals with all the technology in the world at their disposal can not beat the market, I think a person is foolish to spend their time selecting individual stocks. Kudos to Mr. Ellis, he is spot on with his advice, ignore it at you finical

Jim MacGillivray from NM posted over 2 years ago:

As 72 year old former investment advisor, I really like this approach. Some may like to consider the new Aristocrat ETF as part of their portfolio. Symbol is NOBL. It offers a lot that is consistent with recommendations in this article.

Jon Pollock from WV posted over 2 years ago:

I enjoyed reading Dr. Ellis' perspective as well as the accompanying comments. As with many amateur investors, I have probably made several of the taboo moves described and losses, along with gains, have been part of my investing life cycle. One very important issue I think is to have this conversation with young people. My father was ill-prepared to advise me about any financial matters and, as a result, I was subject to the greed and avarice of a broker who churned a previous account. I felt almost helpless because I was inexperienced. The most important thing Dr. Ellis illustrates in his "letter" is to have the talk with your children and grandchildren and educate them. They will make choices, good and bad, but at least they will have the tools to make the choices knowingly.

Don King from North Carolina posted about 1 year ago:

The very first and THE most important long-range investment one can make is 10% off the top to the Lord. It's absolutely amazing how much better the remaining 90% will function for you, and the returns can't be beat!

a. blanchard from texas posted about 1 year ago:

This is as good as it gets. I bought my 1st stock the day the Korean war broke out and have owned stocks ever since. My father in law was my advisor. His slogan was "buy quality and hold", advice he had received from a retired colonel who worked for MLPFB. This is in a way a summation of the advice in this letter. I have been comfortably retired for 32 years following this rubric.

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