The glorious 20’s… the years of careless freedom, endless opportunity and blossoming careers. If you ask any investor in the world what their advice would be to a 20-something year old? Invest. Invest. Invest. If you leverage the power of investing when you’re young, the benefits can be immense. Even with university debt, maxed out overdrafts and low salaries you can always still invest. From as little as £5 anyone can enter into the magnificent stock market, and boy oh boy could it pay off in the long term.
So, why are your 20’s prime investing time?
Time is everything when it comes to investing. As a 20-something year old money can be limited, but the one asset you have at your disposal is time, and time just so happens to be an imperative ingredient to long term investment success. Why is time so critical in the investing world? One simple word – compounding. The longer money is put to work, the more wealth it can generate in the future.
Compounding – An Investor’s Best Friend.
Compounding is a mathematical phenomenon, which will be your greatest friend when it comes to investing. Compounding is the magic ingredient which allows your portfolio value to grow exponentially. Simply put, it’s how money creates more money. Compounding is most effective the longer you put it to work. Which is why investing in your 20s enables you to exploit the power of compounding which can have a huge effect on your portfolio growth. The best way to understand compounding is through these two examples:
an apple a day
Time for a hypothetical, you buy and store 100 apples every month. With no compounding you would simply have 100 apples after 5 months.
However, say, for example, I offer you a once in a lifetime deal – I tell you that every month I will add 10% more apples to your collection.
With 10% monthly interest, after 5 months you have an extra 60 apples in addition to the 100 you started with. That’s a 60% increase in your ‘apple portfolio’, effectively you are getting 60 apples for free through compounding.
enough apples, show us the cash
Both Bill and Ben invest £100,000 in identical portfolio’s over their lifetime.
Bill starts investing at 21, he invests £215 a month.
Ben only starts investing at 30, but now he’s earning the big bucks so he invests £278 a month.
So, they invest the exact same amount of money, with the exact same amount of growth – 6% every year. But, of course, compounding changes everything. Due to Bill starting 9 years earlier, his portfolio has more time to compound.
Bill ends up with £421,450, a whole £121,818 more than Ben. Bill and Ben did everything identically, the one and only reason Bill is £121,818 richer is because he started investing in his 20’s.
More Risk Tolerant
When you’re in your 20’s, the chances are you have limited financial responsibilities; no mortgage, no car, no school fees and no kids. Naturally, you can afford to take on more financial risk within your investment portfolio, making it more aggressive in exchange for potentially higher returns. If your portfolio starts off with low/negative returns this won’t be as big a deal to you. You have the flexibility to absorb these low returns to start off with while you learn your way around investing and start building your (profitable) investment strategy/portfolio.
Being young and more risk tolerant also gives you the freedom to experiment with your investments, homing in on a refined investment strategy which suits your long-term objectives. So, by the time you’re in your 30s and start wanting a more secure and stable investment income you will already have a great, well-diversified investment portfolio you spent your 20s perfecting.
Flexibility, Drive and Perseverance to Learn
There is a lot to learn when it comes to investing, but once you get the fundamentals locked in you can learn quickly as you go. Luckily, as a young adult, you have the flexibility, time and drive to commit to learning a new skill.
When you start investing it will most likely take you a while to learn the ropes. Therefore, the first couple of months, or even years, you may not get the high returns you hoped for… some may even experience losses. But as discussed earlier, your youth and limited financial responsibility places you in a position to absorb these short terms losses. Learning to invest is like learning any new skill – it takes time to learn and perfect.
Access to Tech & Free Resources
There is an abundance of free resources and tools the younger generation have at their disposal. Their access to new tech and ability to use it makes them able to study/research the markets from anywhere in the world. DIY trading platforms offer numerous opportunities for technical analysis, as do chat rooms and financial and educational web sites. These resources can all help build a young person’s knowledge and confidence within investing.
Investing is a tool which can unlock endless doors and provide countless opportunities for you as you go through life. If leveraged effectively, investing can grow your money, year in year out, for the rest of your life. One thing I can say for sure – If you start now, in your 20’s, you’ll be sat at your computer when you’re 40 or 50 or 60 smiling away, thinking about all that compounded wealth.