For many young adults, it seems easier to put off any investing decisions until their financial situation becomes, at least theoretically, more stable. Twenty-somethings, however, are actually in a prime position to enter the investing world, even with college debt and low salaries.
While money may be tight, young adults have a time advantage. There is a reason that compounding – the ability to grow an investment by reinvesting the earnings – was referred to by Albert Einstein as “the eighth wonder of the world.” The magic of compounding allows investors to generate wealth over time, and requires only two things: the reinvestment of earnings and time.
A single $10,000 investment at age 20 would grow to over $70,000 by the time the investor was 60 years old (based on a 5% interest rate). That same $10,000 investment made at age 30 would yield about $43,000 by age 60, and made at age 40 would yield only $26,000. The longer money is put to work, the more wealth it can generate in the future.
Take on More Risk
An investor’s age influences the amount of risk he or she can withstand. Young people, with years of earning ahead of them, can afford to take on more risk in their investment activities. While individuals reaching retirement years may gravitate towards low-risk or risk-free investments, such as bonds and certificates of deposit (CDs), young adults can build more aggressive portfolios that are subject to more volatility and stand to produce larger gains. (For more information, check out A Simplified Approach To Calculating Volatility.)
Learn by Doing
Young investors have the flexibility and time to study investing and learn from both successes and failures. Since investing has a fairly lengthy learning curve, young adults are at an advantage because they have years to study the markets and refine their investing strategies. As with the increased risk that can be absorbed by younger investors, so too can they overcome investing mistakes because they have the time needed to recover.
The younger generation is a tech savvy one, able to study, research and apply online investing tools and techniques. Online trading platforms provide countless opportunities for both fundamental and technical analysis, as do chat rooms and financial and educational web sites. Technology, including online opportunities, social media and apps, can all contribute to a young investor’s knowledge base, experience, confidence and expertise. (To learn more, read Technical Analysis.)
Human capital, from an individual’s perspective, can be thought of as the present value of all future wages. Since the ability to earn wages is fundamental to investing and saving for retirement, investing in oneself – by earning a degree, receiving on-the-job training or learning advanced skills – is a valuable investment that can have strong returns. Young adults often have many opportunities to increase their ability to earn higher future wages, and taking advantage of these opportunities can be considered one of the many forms of investing.
The Bottom Line
Saving for retirement is not the only reason to make well-planned investments. Many investments, such as those made in dividend stocks, can provide an income stream throughout the life of the investment. Twenty-somethings have certain advantages over those who wait to begin investing, including time, the ability to weather increased risk and opportunities to increase future wages. (For additional reading, see Why Dividends Matter.)