Why it’s never too late (or soon) to start investing
Here are 7 reasons why every investor should start building their portfolio as early as possible.
Many of us would rate "investing" quite low on a list of fun things to do. It is something older people with well-paying jobs do, or people with lots of money to spare – even those who are planning for the future, which seems like a distant thing when you are younger. Our solution: Let's wait a few more years until we are more settled in our job, life, city, etc.
And yet, one of the smartest long-term decisions any young adult (or even a teenager) can make is to start on this journey early. Because it's not about how much you invest, it's about how long.
Here are the top reasons why it makes sense to start on the investment journey as early as possible:
Expenses are lower
First and foremost, we spend very little when we are younger and starting a career. There is less in terms of routine or unavoidable expenses. Younger people live in shared spaces, buy used cars, don't typically own a house or pay a mortgage, and are less likely to be financially supporting others such as kids or elderly parents.
As we grow older, our responsibilities and commitments increase and our priorities change, leaving much less to invest. While earnings may be limited when we are younger, our simpler lifestyles will undoubtedly leave some spare cash that is worth investing.
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Advantage of time
One of the most important reasons to start investing early is a concept called 'compounding'. In basic terms, it means earning interest on interest. From an investment perspective, it refers to the process by which returns from the original principal investment are reinvested to generate even greater earnings over time. These could be in the form of higher interest or dividends, or from capital appreciation (when stock prices increase).
Let's take an example to really understand the power of compounding.
On your 20th birthday, you decide to invest $10,000 into an index fund (e.g. an ETF) of Australian shares. Let's say this fund delivered an average 5% growth return year. Rather than withdrawing any profits the fund has made, you keep your funds inside the ETF and allow it to keep growing. By your 60th birthday, that $10,000 would have ballooned to more than $70,000.
What if instead, you invested the same amount on your 30th birthday. The same $10,000 plus reinvested returns at an annual 5% growth return will still grow to a substantial $43,000 by your 60th birthday.
But assume your circumstances have been difficult, and you only get around to investing that $10,000 by your 50th birthday. Well, after considering the 5% annual return, you would still have a very significant $26,000 to enjoy on your 60th. As is clear, the power of compounding is greater over a longer period of time.
Greater financial security
Financial security is generally more important later in life than when we are young. But you need to start preparing for it much earlier. When an emergency comes – hopefully much later in life – a safety net is one of the most important factors that will give comfort. Whatever the situation, having that sum in the bank is likely to help in one way or another.
But beyond emergencies, investing early can also provide a sense of financial freedom through life. It makes it easier to quit a bad job without worrying how to survive until the end of the month, or to follow that passion you've always wanted to pursue. Basically, it can help build a solid financial base that helps you make important life decisions with less compromise.
Investing early and getting into the habit of saving can help build a level of discipline that will come in handy later in life. Impulse buying decisions generally happen because of a lack of understanding about how to manage money. But an early exposure to the investing process can help build a strong, wise foundation for making both big and small spending decisions.
Dealing with risk
Risk is an integral part of investing in the stock market. It is something that takes getting used too. Each individual needs to first understand the idea of risk and then arrive at a balanced view about their own risk appetite.
Taking unusually high risks will make it more likely that you lose money, eventually affecting your financial position. Conversely, an unnecessarily low risk appetite will mean losing opportunities to grow investments adequately. It is important to understand this aspect about investing early enough to come to terms with what risk means and what is the best balance for you.
Generally, younger investors also find it easier to play around with risk appetite. On the other hand, older investors tend to be far more conservative.
Life moves much faster than we imagine and soon the distant future may not seem so distant. A few additional early years of saving can mean the difference in continuing to work into your sixties versus taking an early retirement because you have the financial security of your investments to fall back on.
To take a historical example: If someone had started investing in the US S&P 500 index in 2001, at age 20, just their return on the original investment today, at age 41, would be 313%.
It is easier now
Some of the newest, most engaging trading platforms and apps across the world are designed with a diverse audience in mind. Simple to understand, one-click interfaces have brought trading to an audience that never thought it could invest in the stock market.
It also doesn't require tons of money, with brokers providing ways to invest in fractional shares of large companies that can be bought from as little as 1 cent (in the case of Sharesies).
Still, it is important to be cognisant of the risks of share trading. One needs to be cautious about not getting carried away by the ease of trading. Share prices can rise and fall quickly, dividend amounts are not constant, and if a company were to go broke, shareholders would be the last in line to get paid.
Despite these risks, investing can be one of the best ways to build a strong financial foundation.
Picking an investment trading platform
To buy investment products in Australia, you will need to sign up to an online broker or full-service broker. The right broker for you will depend on how you prefer to invest and what you're investing in.
If you're planning to invest a large sum of money, it always pays to get advice from a financial advisor.
If you're looking to buy stocks, you can do so yourself through an online share trading platform. Some brokers let you buy and sell stocks directly. This means you get voting rights and some tax benefits such as dividends.
Image: Getty Images
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