Your younger years wouldn’t be your youth unless they were “wasted” to a large extent with fun and frivolity. Goodness knows, there’s enough time for the more serious cares of life to weigh you down. However, there is one notable exception to that creed: investing. Knuckling down to a serious investing strategy as soon as you can have a transformative effect on your standard of living throughout your life, and particularly in retirement.
It is negligent verging on madness that financial matters aren’t taught more systematically as school. If they were, we wouldn’t see so many young people crippled with debt at extortionate interest rates. Nor would we have a situation where half of Britons get stressed by their finances and great swathes of the population are worried about having enough money in retirement, even if they are quite wealthy. One simple message, save and invest as much as you can, as early as you can, would solve so much.
The eighth wonder
The reason, of course, is compound returns. If knowing that Einstein called this the “eighth wonder of the world” doesn’t move you (or a younger person you’re thinking about as you read this), then perhaps some hard-hitting figures will.
Wealth manager Smith & Williamson has crunched the numbers and they tell a truly compelling story. Say two people saved £5,000 a year, achieved a steady 7.5% annual return through investing those funds and allowed compounding – or growth on growth – to work their magic through till they were 65. If one of those people started at 35, they would end up with £353,800, which is undoubtedly an excellent result. However, if the other person started at age 25, they would end up with £639,150 and thus an incredible £285,000 richer. Time really is on your side when you are young.
It is in other ways, too. One of the great things about getting into investing as early as possible is that you have more time to recover from any losses. Over the long term, equities beat any other asset class by a long margin, but in the shorter term they can be volatile. This generally means that the closer you get to needing to liquidate (i.e. access your money) the less risk exposure is desirable, and your ability to chase higher returns can be curtailed. Not so for the young. When Father Time smiles upon you, you can be far more aggressive, knowing that you can ride out bumps in the road.
Don't gamble with your future
A big distinction needs to be made between being ambitious in your return expectations and being reckless, however.
One silver lining of the pandemic is that the extra free time, and cash, has created a whole new cohort of investors, many of whom are younger. The Financial Conduct Authority has found that a tenth of UK investors have only been putting their money to work in the markets for 12 months or less. However, the FCA also warned that many of these have been attracted into investing by recent crazes like the social media-fuelled battles with hedge funds, the punditry of famous figures and the attractiveness of certain apps. As a result, alarming numbers are investing in high-risk assets like cryptocurrencies and foreign exchange and, even worse, are often leveraging up with instruments like Contracts For Difference (CFDs), which mean their losses could well exceed their initial stake.
Thrills (and spills)
In fact, the FCA’s study found that high-risk investors ranked “the thrill” or feeling of status that came from investing higher than functional, sensible reasons like wanting to make their money work harder or saving for retirement. Alarmingly, almost eight-in-ten said they trade on instinct and believe they know a “safe bet” when they see it. The financial services industry is no doubt horrified by the risks these bright young things are taking with their hard-earned cash. Thrills almost invariably lead to spills at some point.
Losing a significant sum of money at a young age may or may not be a disaster in and of itself, but it may well put that person off investing, possibly for life. It will certainly dent those compound returns a great financial future is built upon.
If they can afford it, younger investors can by all means have a pot of money they trade for fun. Indeed, many older investors have a satellite portfolio for this purpose too. The key thing is not to mistake the cherry on the cake for the cake itself. You should be looking at your investments to sustain you for life.
It’s a truism that proper, professional-grade investing should be pretty boring. Slow, steady - and as early as possible - wins this particular race.