Advice to graduates

In June 1997, Chicago Tribune writer Mary Schmich penned a now-famous column titled “Advice, like youth, probably just wasted on the young.” In short, the column served as the speech that Ms. Schmich would give if she were asked to make a commencement address. The following year, the column went viral, if you will, in the form of the music single “Everybody’s Free (To Wear Sunscreen).”

At that time, on a lark, a Vanguard colleague of mine rewrote the lyrics into some practical advice on mutual fund investing. He recently found it in his archives and shared it with me. In turn, I’m sharing it with you in hopes that you’ll share it with somebody who, though recently graduated, could still use some tips from Funds 101.

I’ve changed a few references to bring it up to the present day—but the overall advice is timeless.

Enjoy and please share.

Everybody’s free (to invest in mutual funds)

Watch costs. If I could offer you only one tip for your financial future, “watch mutual fund costs” would be it. The long-term benefits of frugal investing have been proved by Vanguard research, whereas the rest of my advice is no more reliable than the Super Bowl winner or skirt length predictors for the direction of the stock market.

Invest during your youth. Oh, forget about it. You will not understand the power of compound interest until your first kid needs orthodontia work. But trust me, in 20 years, you’ll look back and recall in a way you can’t grasp now how much wealth you could have accumulated if you’d set up a sensible long-term strategy and had the willingness to stick to it. You are not as rich as you imagine.

Don’t worry about past performance. The past performance of an equity mutual fund is about as relevant to future performance as the shoe size of the fund’s portfolio manager. The real troubles with your investment portfolio are apt to be things that never crossed your worried mind, like the Greek debt crisis or an equity market “flash crash.”

Do one thing every day that has nothing to do with money.

Consider the benefits of dollar-cost averaging.

Don’t be reckless with your retirement assets. Don’t put up with portfolio managers who are reckless with them either.

Read Bogle’s Common Sense on Mutual Funds.

Don’t waste your time on market-timing. Even a stopped clock is right twice a day. Use time, don’t choose time. The race is long, and, in the end, it’s won by the tortoise, not the hare.

Remember the taxable distributions you receive. Forget one-year performance figures. Tax-efficient investing has merits yet to become widely appreciated.

Keep your old 1099-DIV forms. Shred your old quarterly statements.

Be patient with value stocks.

Feel guilty if you don’t know what you want to do with your investment portfolio. The most financially well-off people I know knew at 22 exactly what they wanted to do with their financial assets. Some of the poorest 40-year-olds I know are still clueless about money.

Benchmark. Compare your funds to a relevant market index and peer group, regularly.

Maybe you’ll marry, maybe you won’t. If you do, be wary of the marriage penalty tax. Maybe you’ll have children, maybe you won’t. If you do, invest early in a college savings account.

Enjoy your right to invest passively. Use it in every market segment you can. Don’t be afraid of what other people say about indexing at cocktail parties.

Think long-term. Set realistic expectations for future market returns.

Read prospectuses, even if you have no desire to.

Don’t read blogs by pundits opining on the daily ups and downs of the world’s stock markets. Listening to such noise will do nothing to increase the value of your portfolio.

Get to know your portfolio managers. You never know when they’ll move on for style drift or consistent underperformance or a higher salary elsewhere.

Understand that fund styles come and go. Sometimes growth wins, sometimes value. The older you get, the more conservative with your portfolio you should become.

Give serious thought to investing internationally, but it may be wise to keep no more than 30% of your equity assets overseas.

Accept certain inalienable truths: Fund expenses tend to rise as your assets grow. Most fund managers will underperform. You, too, will get old. And when you do, you’ll fantasize that when you were young, fund managers were stars and children didn’t need a 529 plan and a student loan and an UGMA account to pay for college.

Respect the time value of money.

Don’t expect Social Security to support you. Maybe you’ll have a large 401(k) balance. Maybe your Roth IRA will thrive. If managed prudently, your investments may outlive you.

Don’t mess too much with your portfolio, because by the time you’re 60, you may have lost 85% of it to taxes and opportunity costs.

Be careful whose advice you buy and how much it costs. Costs matter. Financial advice is available everywhere and at a variety of prices. Dispensing it is a way for some to gain fortunes greater than yours.

And trust me on the fund costs.

Notes: All investments are subject to risks. Foreign investing involves additional risks, including currency fluctuations and political uncertainty. Links to ChicagoTribune.com and YouTube.com will open new browser windows. Except where noted, Vanguard accepts no responsibility for content on third-party websites.