Letter to my grandson: investment lessons for life

A couple of years ago, I used my Daily Telegraph column to write a letter to my daughter. Her recent wedding and 30th birthday seemed like a good moment to pass on some of the things I had learned about investment over the years - things I wished I had known thirty years ago. I am sure I will be forgiven for now writing a follow up missive to her new son. Congratulations A___, and welcome T___.

Becoming a grandparent for the first time focuses the mind on the sweep of time. Assuming you look after yourself, you may well be passing on pearls of wisdom to your own grandchildren in the early years of the 22nd century. My grandmother, who I knew for more than 20 years, was born in the last decade of the Victorian age. Five generations spanning four different centuries.

The changes already and still to be experienced during the lifetimes of people I have been lucky to share time with are mind-blowing. My grandmother arrived in a world without widespread electrification, before cars or air travel, decades away from the digital revolution that has shaped my life. Your zero carbon, AI-powered world was inconceivable in 1894.

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The 130 years or so since Grandma was born have been a time of massive technological advancement and wealth creation. We are immeasurably richer and healthier today. No-one knows what the 100 or so years that you could enjoy are going to bring. But it would be surprising if human ingenuity did not keep us bounding forward.

You will have little control over much that will unfold during your lifetime, but there are things that you can do to improve the chances that when you are writing to your own grandchild you are doing it from a position of comfort and financial security.

The first thing we can help you do is to learn from and not repeat the mistakes of so many of our compatriots, who have spent the last 25 years sheltering in the illusory haven of cash. According to research by my colleague Marianna Hunt, the quarter century since 2000 has seen British households reduce the proportion of their financial assets held in investments from 23% to 17%, while increasing the proportion hiding in cash from 19% to 35%.

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That represents a massive and misguided flight to safety, which has cost them a life-changing amount of money. Over that 25-year period, global stock markets have outperformed the returns on safe but unrewarding cash by a wide margin, despite a couple of periods of heavy losses.

Marianna compared two savers, who both started in 2000 with £5,000 and added £1,000 a year for 25 years. One of them lost their nerve after three years of losses and transferred what remained of their investments into cash at the end of 2002. The other held firm and stayed invested throughout. The first investor-turned-saver ended up with just over £38,000. The more courageous, stay-the-course investor accumulated nearly £153,000.

Obviously, you cannot yet imagine what that might mean over your investing lifetime, but I and your mum (who also works in investment) can. So, it will be our job to make sure that in due course you learn this important lesson about the magical power of compounding.

• Read: Compounding in a nutshell

The younger you start on this miraculous journey the more you will benefit, so you will have to trust us to help you take your first investing steps. Fortunately, there are tax-efficient ways even for infants to invest. Leave it with us. Maybe you will want to go to university, you will certainly want to live in a house, and in time you will want to stop working and wind down in comfort. The earlier you start, the less onerous the cost of all that will be.

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The world your great-great-grandmother grew up in was still run by Britain. Her husband, your great-great-grandfather, hung telephone wires through the Malayan jungle. My lifetime has been dominated by the Americans, and their genius for making money has served investors well. I suspect that you will live in a more multi-polar world, and none of us can know in advance who will end up winning the economic battle between the US and China.

So, my advice to you is to put your eggs in a variety of baskets. The world is in transition - it always is - and we do not have a crystal ball. Diversification will help ensure you benefit, whoever ends up on top. And you should not worry that some of your bets will not come off. Time is on your side; massively so. You will be able to ride out plenty of market cycles before you need to start thinking about protecting what you have.

Before you run away with thinking this is going to be easy, though, let me mention something that you are going to have to keep an eye on. If someone had had £10 in 1894, they could have bought things that would cost over £1,100 today. Increasing the cost of living at an average of less than 4% a year over that period has reduced the value of money by a factor of more than 100. You might have to run hard just to stand still.

So, welcome to the world, T. I do not want you to think that all this talk of money means it is the only thing that matters. There are many more important matters to attend to - finding what will fulfil you through the long life ahead of you; picking the right person to share it with; with luck having your own children and grandchildren in the fullness of time. Money cannot buy these joys, and it is no replacement for them, but treat it with respect and it will make them easier to achieve.

This article was originally published in The Telegraph

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