We often hear it said “Young people today are not as hardworking as before”; my personal experience, even if it is certainly not representative of all young people, shows me quite the opposite! Besides, isn’t complaining about the younger generation a habit of people from previous generations.
So let’s talk about the advantages of starting to invest early, and the mistakes that young investors often make.
We all know that starting to invest early is an extraordinary advantage for those who can afford it. Think about it: a nest egg of some $20,000 invested in the stock market at age 20, a sum which, I agree, is not easy to put aside at that age, would be worth nearly $1.5 million when the young person will be 65, 45 years later. This progression assumes a compound annual return of 10%, approximately the historical performance of North American stock markets over the past 100 years or so.
To obtain such an amount at age 65, someone who started putting money aside and investing it at age 45 will have to save approximately $25,500 per year for 20 years, or more than $500,000, still assuming a compound annual return of 10% obtained from the investments.
Another phenomenon that stands out to me when I talk to young investors is that savings have a much greater impact on the value of a portfolio when you start investing. For example, the young employee who has accumulated investments of $50,000 and who manages to contribute $5,000 to his RRSP has just increased the value of his portfolio by 10%. It’s huge and stimulating!
In fact, at the start of an investor’s journey, savings are significantly more important than returns. Over the years, the importance of the two reverses: it is the portfolio’s returns that will contribute the most to the increase in its value. A 10% appreciation of the fifty-year-old’s $500,000 portfolio means an increase of $50,000 in his portfolio.
This phenomenon is a good thing for young investors because it is probably in their younger years that they will make the most investment mistakes. I believe that the main mistake that young investors face is wanting to move too quickly. This is paradoxical since it is precisely the young who benefit the most from the irreplaceable advantage of time!
By wanting to go too fast, many young people will take too many risks. Whether by investing in speculative securities (I can’t help but think of cryptocurrencies), by day trading, by betting a significant part of their portfolio on a security or by trading derivative products, not to mention the use of margins.
I tell myself that at least, if one will make such costly mistakes, one might as well do it early, when one’s portfolio is small, and the damage is limited. The 50-year-old who makes the same mistakes with a $500,000 portfolio will probably not be able to recover.
That said, the experience I have had over the past few years with young investors convinces me that most of them invest in the right way, in a disciplined manner and by relying on their greatest ally, time.
