Today, we start with something simple; how to get younger investors focusing on the right steps for their future. Here, we will start with easy ways to get started, benefits of investing, and how to allocate your time and efforts.
I recently had lunch with a young client of mine to discuss investing. During the meeting he said something to the effect of “make me rich Jack!”. To which I replied, “my job isn’t to make you rich but instead keep you rich, focus on the things that can make you money and I will help you not lose it all”.
With younger investors today, I find the focus of their investment strategy “get rich quick schemes”. If I asked a millennial or Gen Z to explain different ways to make money, I’m probably going to hear something about cryptocurrencies, flipping houses, Twitch streaming, trading with Robinhood or making YouTube videos. Now, some of these are new technologies and people are making a fortune investing their time into them but the reality is you need to take appropriate steps to plan for your future…in the event your YouTube channel goes bust.
Investing is a marathon, not a sprint.
For most, the journey to save starts late. In high school, we rarely understand what investing is, then we go off to college and spend whatever we had saved. We graduate, buy a home, a car, a boat, start traveling, get married and start a family. All of this is a perfect start to life but at a young age, investing even small amounts, can really have a meaningful impact on your future. I’m not saying to make it a full job but have at least some time and effort into saving for the future.
The problem for most is by the time they can actually sit down and begin to focus on their investments, they are mid 40’s early 50’s and have ruined a lot of opportunity for compound interest to do it’s thing.
Compound Interest Is Simple. Think of it simply as “interest on top of interest”. If an investment pays you cash, you then reinvest that cash back into the investment and buy more. Next time it pays out cash you should have received a larger cash payment, which again you reinvest. You are now “compounding” on your original investment.
Now, why this is important is simple. The longer you have to let this machine compound over and over again, the more wealth you will accumulate.
To test compounding, simply take out a calculator and enter $5,000 x 1.1 and keep pressing the equals sign over and over again. It look’s something like this (rounded):
- $5,000 x 1.1 = $5,500
- $5,500 x 1.1 = $6,050
- $6,050 x 1.1 = $6,655
- $6,655 x 1.1 = $7,320
- $7,320 x 1.1 = $8,053
- $8,053 x 1.1 = $8,858
- $8,858 x 1.1 = $9,744
- $9,744 x 1.1 = $10,718
Every time you press equals, this is the same thing as compounding (1.1 = 10%). It doesn’t take long to see your original $5,000 is much larger only after a few years of compounding.
This is your main benefit as a younger investor. The more times you can “press the equals sign” and compound your money, the better you will be in the future.
A downside to working with young investors is that they see it as a waste of time to invest money when they only have a few thousand dollars, but you have to start somewhere. I’m here to tell you, they are totally wrong.
As a financial planner, a lot of my conversations are helping people figure out how to fund certain hobbies or necessities in the future. If you could ask ANY retiree what they wish they would have known earlier, I guarantee the majority say “I started saving earlier.” Back to my original point, a huge issue with saving is that most investors start late. Take a look at what 10 years difference makes when you start with the same investment:
In the 1950’s-1970’s it was common to work for an employer your entire career, then retire on a large pension as well as social security. But the times are changing. With social benefits (ie: Social Security and Medicare) needing a revamp and most pensions benefits being removed from employers, the goal to plan and save for your future rests on your shoulders. If you screw it up, you have nobody to blame but yourself.
The easiest way to protect your future is to start saving now and just let compounding do it’s thing. Obviously, if you buy terrible investments or get loaded up with high fee products, you can shoot yourself in the foot. But there are plenty of great options out there to help you eliminate a lot of those options.
Here are a few tips that I would advocate younger investors focus on when it comes to their investing:
Get Started Sooner Than Later:
If you are able to open up an account with any online investment shop, DO IT. If you have a 401k, contribute to it. If you had a ton of cash sitting in the bank earning nothing, invest it. You don’t have to start with a ton but at least get something happening towards your eventual retirement.
Whether it’s investing in a robo-investing platform like Betterment, Acorns, or Wealthfront or a discounted online broker like Fidelity, Schwab, or TD Ameritrade, just get your money working for you. Working with a financial planner or CPA you can identify the right type of account from a tax perspective as well.
Don’t Be Stupid With Your Investments:
Every time I hear kids tell me they trade on Robinhood or are making money flipping cryptocurrencies, I shake my head. Investing is not meant to be an adrenaline rush but instead a long-term process. I have no problem with speculating with investments but realize you are in-fact, speculating.
6 minute abs never actually got you a six-pack in 6 minutes, but it sure sold a hell of a lot of DVD’s. Investors love the idea of making a ton of money quick and so they gravitate their investment strategies towards themes like this. If I tried to sell a workout program and said it will actually take months, maybe years, of shoving broccoli, grilled chicken, protein shakes and egg whites down your throat along with endless cardio and crunches, I would never get the program off the ground.
Fitness, like investing, is a lifestyle. You have to choose to stick with it for years for best results. It’s also not an overnight success, some investments take years to really begin to workout. However, if you can identify a strategy that works for you and deploy it at an early age, you will be wildly successful. And always remember that compounding works both ways. You can just as easily compound your losses as your gains so make sure your investment process is solid!
I will do another post in this investing series geared specifically towards investments but for now let’s just leave it as you need TIME to be on your side.
Focus on How You Get Paid:
This is overlooked often but the one of the most important sections. Saving and investing is a luxury for individuals with the ability to do so. The only way to increase your saving is to make sure your compensated enough to afford doing so. The question comes in as to what can you be doing to improve your overall pay.
Countless studies show increasing your investment returns are nowhere near as valuable as increasing your earnings and skill sets relevant to do your job. This is especially true at a young age.
If you like your company and co-workers, what can you be doing with your time to improve your value to your firm? Investing time into certifications, designations, or other work-related activities is much more important that trying to increase your annual investment returns by a few percentage points. If you are not happy with your employment, the next step comes in shopping yourself around. It never hurts to put yourself on the market and see what other companies will pay you.
Find Money and Opportunity in the Things You Enjoy:
There is a great quote that from famous investor Peter Lynch:
Invest in what you know.
This is always a great start for newer investors. Stop and look at things you spend your day interacting with and try to find an investing angle. Maybe it a product or service you use through work, a website you frequent, a brand you adore. Investment opportunities are always in front of it and its great to start with the things we know. A stock at the end of the day is simply ownership in a company.
As consumers, we spend our discretionary income on various products and services. Taking a step back to look at how you personally spend your money will open your eyes to many of these companies. My point is, most businesses are operated as “for profit entities”, meaning they are trying to make money doing whatever it is they are doing. If you can identify the company behind the curtains, you have taken a few steps towards identifying potential investment options. Think hard about where you should invest your money but I would bet there are a lot of wonderful investment options right under your nose.