This post is part of a series with the same theme: letters addressed to my younger self.  These letters, written by an “older me,” would have helped me navigate some of the rough waters I faced during various phases of my life.  They would’ve also helped me when I was faced with difficult decisions.  Through these letters, I hope to impart some of my admittedly limited experience on my two wonderful children and, eventually, on their children.  The first post was: On Accumulating Things.

Dear 22-year-old self:

In this letter, I’m going to cover one of those topics where there’s little confluence of opinion: the stock market.  Some will tell you it’s the best place to save your money; others will tell you it’s too risky.  Some will tell you that you should buy and hold for the long-term; others will tell you that timing and portfolio rebalancing  strategies are critical.  Many books with completely contradictory advice have been written on the topic.  The problem is that they’re all right because “it depends.”  So, the question becomes: which philosophy is right for you.

You see, I think there are three factors that dictate the extent to which one should expose themselves to the stock market:

1. Your appetite for risk.  The stock market is an inherently volatile, risk-prone adventure. The more you’re psychologically able to deal with the ups and downs, the more you’re able to allocate to the market.  Beware, though, that they’re right when they say the market tends to “climb the stairs” (i.e., climbs a gradual stair step) but “go down the window” (i.e., falls precipitously).

2. Your financial situation.  It’s one thing to have a very large nest egg that is looking for a place to be invested; it’s quite another if you’re still making ends meet and trying to build a life for yourself.  In short, my advice to you is not to think about the stock market too much until you are completely debt free.  If you have debt (on anything: home, car, land, etc.) but are investing a substantial amount in the stock market, you’re essentially borrowing from one asset to invest in another!

3. Your talent & expertise.  Some people have a knack for stocks, others understand real estate, and others are natural business people.  Invest where your skill set and natural talents lie.  You’ll find that you tend to be more successful with one over the others.  While you should certainly diversify across classes, focus your attention on the types of investments where you have the most understanding and a track record of success.

So, given I know you better than most, let me cut to the chase for your personal situation:

the stock market is a great place to make money, but not a great place to store it.

The following are some great ways to “make money” in the stock market at any point in time:

• Incentive equity provided by an employer.  if you believe in a company enough to join it as an employee, hopefully you believe the company’s equity will be worthwhile.  Don’t undervalue that equity.

• Employer-matching retirement plans.  401k plans that have employer-matching components are hard to beat.  With those plans, you’re frequently nearly guaranteed a 50% or more return, depending on the company’s plan, return rate due to the match.

• Building a business.  The ultimate investment in equities is actually building a business, either from the ground up or taking it from one size and scaling it to another.  Few opportunities for wealth creation match that of creating enterprise.

Sincerely,

Your 41-year-old self.