If there are people who should be talking and thinking more about investing, then it’s the young people. The greatest force in investing which is compound interest feeds on the one thing that young people have in abundance: time.
It is necessary for every young investor to know the game they are playing and what they should be optimizing for in their early days of investing.
Here are a few thoughts on what young investors ‘should’ focus on in their early years of investing.
1. Your Time Horizon is Decades
In the Psychology of Money, Morgan Housel writes,
“More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are wonderful. But very few pay enough attention to the simplest fact: Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was a child.”
Warren Buffett began investing when he was 11 years old. Most of his returns from investing have come as a result of compounding.
While it may be hard for the average person to start investing at the tender age of 11, the youth are the only people who can at least try to come closer to starting investing as early as Warren Buffett did.
This graph will show you just how it’s important to get started with investing early on in your career.
As you can see, someone who starts saving and investing at 25 years is way better than someone who starts ten years later, at 35.
2. The Biggest Holding in Your Portfolio is You
In the words of Jason Zweig,
“the biggest holding in your portfolio is you- income that your career will generate over your lifetime.”
As a young person, most of your financial value is already contained within yourself waiting to be unlocked over time. The mistake young people make is trying to optimize their current income over their future income.
Most young people with a lot of potential choose paths that reward them with low income for now instead of optimizing for careers that will reward them heavily in the future.
Let’s say you are a computer science student who intends to create a path in any tech space but you currently have a job as a data entrant. Your current income, for now, is let’s say 20K per month, but if you end up building a successful career as a software engineer or developer, your monthly income would be more than 200K per month.
It would even be wise to quit your current job (if you have other ways of footing your bills) and focus on building your career. If not, you shouldn’t lose focus on building your career and getting skilled and experienced as early as you can.
As a young person, stop focusing on your biggest problem and focus on your biggest opportunities. You may be struggling to pay your bills in your early days, but don’t let the short-term warmth burn your future.
And the one thing with income, only the huge changes in income will change your life greatly. If you currently earn 25K a month, earning 40K a month won’t change your life that much. But earning 200K per month will change your life financially.
“Your skills and knowledge will do far more for you than any amount of investment returns over your lifetime. You wouldn’t be able to invest without the ability to work hard or the ability to save, which are both related to your human capital. So keep at it and keep grinding.”Nick Maggiulli
3. Run, Then Walk
For young people, our time horizon is in decades or more than half a century. To get the most out of your investments, you have to give them the one factor that matters most in compounding and that is time.
You should try to save and invest as much money as you can early in your career. Why is this?
“This strategy is so effective because money invested earlier typically grows more than money invested later. Moreover, compounding money is easier than saving money.”Nick Maggiulli
This strategy will help enjoy the benefits of a solid financial plan from early on in your life and career.
4. For The Best Guaranteed Returns, Prioritize Index Funds
Now that our time horizon is in decades, which are the best places to invest your money and hold for the long term to realize maximum returns?
If you understand the math behind compounding, you will realize that the most important question isn’t, “How can I earn the highest returns?” It’s, “What are the best returns I can sustain for the longest period?”
“If you can meet all your goals without having to take the added risk that comes from trying to outperform the market, then what’s the point of even trying?
I can afford not to be the greatest investor in the world but I can’t afford to be a bad one.”Morgan Housel
So which assets should you be looking out for maximum guaranteed returns?
The answer is index funds. As Ben Carlson writes, “Picking individual stock winners over the long term is difficult because many of today’s companies simply won’t be around in 3-4 decades.”
The biggest stocks that dominate the stock market change over time as do the sectors as you can see from the top 10 biggest stocks in the S&P 500 going back to 1950.
Still, do not rule out investing in individual stocks, as even young people should be taking up more risk in their portfolios. The ‘smarter’ option is trying to build a portfolio with the biggest portion in index funds.
Instead of struggling to predict which company will do well in the next few decades, why not invest in the entire market that will go up?
You can outperform more than 80% of your fellow investors over the next several decades simply by investing in an index fund- and doing nothing else.”Mark Hubert
5. Create Meaningful Experiences Early On
One major challenge in personal finance comes in finding the right balance between meaningful spending and saving wisely. Many people do not get the balance. Most people exist at the extreme ends of the spectrum as either spendthrifts or over savers.
While saving money and investing early on is important, it’s even more important to invest in meaningful experiences early on in your life. And these experiences often require money.
In his book, Die with Zero, Bill Perkins writes,
“If you spend hours and hours of your life acquiring money and then die without spending all of that money, then you’ve needlessly wasted too many precious hours of your life. There is just no way to get those hours back.
If you die with $1 Million left, that’s $1 Million of experiences you didn’t have. The question we all must answer is how to make the most out of our finite time on earth.”
So in as much as your goal is to save and invest as much money as you can early on in your career, don’t also forget to invest in meaningful experiences. Bill Perkins adds,
“You should focus on maximizing your life enjoyment rather than on maximizing your wealth. Money is just a means to an end; having money helps you to achieve the more important goal of enjoying your life. But trying to maximize money gets in the way of achieving the more important goal.”
Try and earn the highest income you possibly can. Save and invest most of your income early on in your career in a low cost index fund.
Hold your investments for decades to enjoy the benefits of compound interest. And as you do all this, don’t forget to prioritize investing in experiences that will enrich your memory bank in old age and fill your life with joy and satisfaction.