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mentalswouldsuggest. I think this isall beingheldupbymassiveamounts
of central bank liquidity. I amnot overlyencouragedby theglobal economy
right now, and I’mnotwildlydiscouraged, either.What discouragesme is
the level of theequitymarketscompared to that fundamental data.
What happensas the Fed tapers?
How dowe unravel from all of this? That is part of the reasonwhy I
amworried.We’ve never really experienced this before.
We don’t have a playbook that says, “This iswhat happenswhen you
keep rates at a very, very low level globally for a long period of time and
you inject enormous amounts of liquidity by growing your balance sheet
and buying assets that no onewants.” The hopewas thatwe create
wealth, thatwealth leads to confidence, that confidence leads to hiring,
and that solves all the fundamental problems.
My issue is you are going to have to reintroduce those assets into the
privatemarkets.What happenswhen you do it, andwhat happenswhen
you do itwrong, andwhat is the rightway, and all that? That’swheremy
caution really lies. It’s not somuch thatwe did it, but that I’m not so sure
thatwe know how to get out of it.
Howdoyouexpress that cautiousview in theportfolio?Or if you
were lesscautious, howwould theportfolio lookdifferent?
You’ll probably chucklewhen I say this: I’mnot so sure theportfolio
would lookmeaningfully different. Theremight bea coupleof names
fewer or a coupleof namesmoreor different positioning in the top10.
But by and large, the characteristics of the companies in theportfolio
wouldnot beany different. Imight just have slightlymore confidence in
individual names. Oneof the things I’ve tried todo toaddress this concern
is toadda couplemorenames to theportfolio. I usually run this portfolio
very, very concentrated—45or sonames, andat thepresentwe’vegot
50. That sort of helps, at least inmymind, todiversify the risk a littlebit.
Theother thing that you’ll see is I’ll runwitha littlebitmore cash.
Typically, I runwithanywherearound, say, 2% cash,which, you know, I
think is a reasonable level toallow yourself tohave some flexibility. But
inaperiodwhere you’remore cautious, I tend tohavea littlebitmore.
Sowe’vehadanywhere from3% to sometimes 4% cash. But by and
large, theportfoliowouldn’t bedramatically different—andoh, by the
way, Iwouldhopeandexpect that that is exactlywhat youwouldwant.
Healthcareaddeda lot to returnsover thepast year. Do those
ideascome fromJeanHynesandher teamor are thesedevel-
opedby you?
Both. If I think about the names in the portfolio in the health care
sector, it is a very substantial weight, to your point. A number of those
names are names that I thinkwe sort of came upwith, but I’d be lying—
and you know Jean and the team aswell as, probably better than I do—
but I’d be lying to tell you thatwe don’t lean on them quite heavily for
helping us think through health care. I try to build this brick by brick, but
on occasion you do have to have a bit of a sector view, and I’ve always
thought that over the next 20 to 30 years the health care sector broadly
gression a young person might fol-
low as they age and gain employment:
Starting with their first summer job
at age 15, they invest $1,000 a year
until they graduate from college and
get settled into a career, bumping their
contribution up to $2,000 a year at
23. By age 30, they will (hopefully)
be well-established and able to again
bump their contribution up to $4,000,
and at 40 bump it up again to $5,500,
an amount they continue to contribute
up until retirement.
You can see that the greater the con-
tribution and the greater the time that’s
passed, the larger and faster the account
grows. That is the power of compound-
ing—by constantly adding to your
investment, you increase the potential
return, going from what seems like a
paltry$1,000 initial investment at age15
to$225,000byage60, simplybyadding
$1,000ayear to theaccount, achievinga
6%annual returnandpayingno taxeson
your income and gains.With larger ini-
tial (and subsequent) investments, you
get evenmore bang for your bucks.
But I also put together another sce-
nario that may be more realistic, par-
ticularly when we’re talking about real
markets and real teenagers. First off,
few teenagers are going to be able to
earn $5,500 in a summer, though they
might beable tohit that numberorhigh-
er if theywork during the school year.
Also, as you know, markets don’t
compound in a straight line. They go
up and down. So, in the charts on this
page and the next, I’ve assumed that
our teen (or guardian angel) is not only
socking away more modest sums, but
does so from the age of 12 to the age
of 25,when, presumably, Juniorwill be
out working, saving and investing on
his or her own.
In the three scenarios, I’ve assumed
the actual returns from
Total Stock
Market
,
Total Bond Market
and
Wellington
from 2000 through 2013.
Despite two stock bear markets dur-
ing thisperiod,Wellington,whichkeeps
about 60% of assets in stocks and the
remainder inbonds,matchedor slightly
beat the returns fromTotalBondMarket
aswell asTotal StockMarket.
These charts might be just the thing
to show the teen or young adult you’re
interested in leading down the road to
retirement. I hope I’ve both made the
benefits of funding an IRA clear, and
simplified it enough that ayoung inves-
tor can understand it. But the question
remains: How canwe get a teenager to
save for retirement?
You probably can’t. So, my advice
is to help them. That’s what I did with
both ofmy kids.
Let’s assume you can afford to
match their summer earnings. Do it.
Let themhave their hard-earnedmoney,
but open a Roth IRA in your child or
grandchild’s name and add the money
RealCompounding:
TotalStockMarket
12
13
14
15
16
17
18
19
20
21
22
23
24
25
$1,000 per year
$1,500 per year
$2,000 per year
$2,500 per year
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
AGE
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