The Sentence: 25 words worth of investing advice for young lawyers.

Welcome to the seventh post of The Invested Counsel—thoughts about financial planning for young lawyers.

This post is pretty simple. I wanted to give the best possible investment advice for young lawyers in a single sentence (hereinafter, “The Sentence”).

The rest of the post will explain what The Sentence means, and the next few weeks of posts will explain how to implement The Sentence, why The Sentence is good advice, and then compare the real-world portfolios of some (purportedly) smart people against The Sentence.

What is The Sentence?

Here it is:

Your long-term money can (and maybe should) be invested long term in a single, globally diversified, total market, low cost, market cap-weighted equity index ETF.

What does The Sentence mean?

Like any good litigator, I’m going to break The Sentence down into its constituent parts by numbering them. The Sentence has (at least) eleven separate elements:

Your (1) long-term money (2) can (and maybe should) be (3) invested long term in a (4) single, (5) globally diversified, (6) total market, (7) low cost, (8) market cap-weighted (9) equity (10) index (11) ETF.

What money does The Sentence cover?

(1) Long term. The Sentence only applies to long-term money, which is money that you (or anyone else) will not be using for a very long time. More than ten years is definitely a long time. Five to ten years is probably not a long time. Less than five years is not a long time.

What should I be investing my long-term money in?

(9) Equity. For your long-term money, you should be invested in “equities.” “Equities” is another word for stocks. And stocks are pieces of ownership of a company. It can get much more complicated than that, but for regular people (including, but not limited to, young lawyers), you just need to know that equity means stock.

Why should you invest in stocks? Because over the long run, they go up in value, and make you richer. There are two ways in which owning stocks do this. The stock can give you some money (i.e., pay a dividend), or they can increase in value (i.e., capital appreciation). For most purposes, it doesn’t matter too much whether you get richer because you got a dividend or because the stock appreciated in value. In the end, you are in the same position (i.e., you have more money).

There are many different things that you can invest in. But over the long run, investing in equities (i.e., stocks) is a good idea.

How do I buy stocks?

(11) ETFs. You don’t need to buy the stocks themselves. Instead, you should buy an “exchange-traded fund,” which is also known as an ETF. An ETF is just a box that owns a bunch of stocks. If you buy a share of an ETF, you will own a little bit of a bunch of stocks.

But which “bunch of stocks” should I buy?

(10) Index. The bunch of stocks you should buy is included in a list. That list is called an “index.” An index is just a list of stocks, and an “index fund” is an investment that owns the stocks on that particular list.

But which “list of stocks” should I buy?

(5) Globally diversified, (6) Total market. You should buy an ETF that owns (pretty much) every stock in the world. That means it should be “total market,” meaning that it owns (pretty much) every stock in a stock market. And it should be “globally diversified,” meaning it should own (pretty much) every stock in (pretty much) every stock market in the world.

But how much of each stock should I own?

(8) Market cap-weighted. There are a lot of different companies in the world. Some are big, and some are small. You should own an ETF that owns each stock in proportion to its size.

Basically, the people that create a market cap-weighted index list the sizes (i.e., the market capitalizations) of each company in the world, add those up, and then figure out what percentage each company represents in the total. If there is a stock that represents 1% of the total value of all companies in the world, then an ETF following (i.e., tracking) that index would invest 1% of its assets in that company.

How much is this investment going to cost me?

(7) Low cost. Very little. Every ETF has expenses, and those expenses are expressed as an “expense ratio.” An expense ratio is basically the cost to run the ETF, as a percentage of the assets of the ETF. Thus if an ETF has an expense ratio of 1%, then it will cost you (basically) 1% of your money to own the ETF. You want to have as low an expense ratio as possible. A good ETF could have an expense ratio of around .1% (or less). A 1% or 2% expense ratio is high, and you should avoid investments that charge high fees like that.

How long should I be invested in this?

(3) Invested long term. This investment is for long-term money, which means that you should be invested in it for the long term. You want to buy the ETF and then not touch it for a very long time.

There are two reasons you should hold on to your investment for a long time. First, in the short term, stocks (including equity index ETFs) can be very volatile—meaning they can go up and down a lot. If you sell the ETF soon after you buy, it is much more likely that you’ll sell when the ETF is down. Second, in the long term, stocks (including equity index ETFs) generally go up a lot. Thus if you hold the ETF for a long time, it is more likely to grow a lot.

Is The Sentence enough?

(2) Can (and maybe should). Investing can be complicated, but it doesn’t need to be complicated. The dual virtues of The Sentence are that it provides good advice, and it provides simple advice.

Note that you do not need to invest in accordance with The Sentence. But you can invest in line with The Sentence and do very well, and I think most young lawyers probably should invest in line with The Sentence. Over the next few posts, I'll explain where you may want to deviate (slightly) from The Sentence.

How do I follow the advice of The Sentence?

(4) Single. You may be able to buy just one thing—a single investment, which is itself represented by two letters. Next week, I’ll explain what that two-letter investment is, and more importantly, teach you the hand signals my seven-year-old daughter and I use to talk about it.

That’s all for now. Have a wonderful week.

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