This is an Other Side of the Fence article, in which I take the opposite viewpoint of a popular idea and/or debate a specific thought.
Talk to any financial adviser and they’ll all say the same thing. It’s never too soon to start investing, investing young is the way to go. Then they’ll put out the table comparing Tommy at Suzy. Tommy starts at age 25, Suzy at 35, and each invest the same amount for 10 years, but Tommy completely kicks Suzy’s butt and has a lot more money by age 65. If you’re even a freshly minted investor I’m sure you’re able to visualize this table that illustrates the classic time value of money model. If you’re investing young you’ll have more time and therefore your money will compound more (at least in theory) because it’ll be invested longer. The thought is that the younger you start, the better off you’ll be in the future, but is investing young best?
On face value investing young makes sense because you’ll be able to capture more time and therefore earn more interest on your invested dollars. However, there are a few things to consider, especially if you’re young and don’t exactly have deep pockets.
Investing young ties up funds – if you’re a young investor you most likely don’t have a ton of money. It’s recommended that even $10 or $20 a month be invested if you can spare the change, but that could be dig into your already small budget. As a young investor your money could be put to better use through bettering yourself with education, experiences, or funding your lifestyle while taking a job that pays less, but gives you great experience. In your twenties maybe it might be better to simply invest in yourself as much as possible before entering the market. Go to Dale Carnegie courses, try to start businesses, take as much education as possible, travel, and grow your brain before you grow your wallet.
Investing young may create a horrible first impression. – As a whole, Younger investors are now becoming more risk averse because of the market conditions they’ve experienced early on in life. First impressions are huge and very hard to overcome so younger investors now associate the market with high risk and where they’ll lose all their hard earned money. Like getting burned on a first date you might want to be cautious when you enter the market so you don’t associate stocks with losing your money over the long term.
Investing young may actually decrease your net worth – Depending on when you invest your 10 year outlook may actually be a loss. If you would’ve invested from 2000 – 2010 in the S & P 500 you would’ve seen your fund go from 1,498 (Jan 3, 2000) to 1,166 (Jan 4,2010). The problem with the chart of time value of money is that it’s based on averages. Averages are based on historical data which can only speculate the future, they cannot guarantee performance and therefore they’re simply an educated guess. When you begin to invest when you’re young, may actually be more important, especially if you’re not following dollar cost averaging.
In my personal opinion young investors should only avoid investing if they’re going to use their funds to further their earning potential through education, experiences, or making the choice to invest in their own business(s). Basically they’ll need to beat the stock market or similar investments so the only way to really do that is through businesses or increasing their earning power.
What do you think? Should young people focus more on investing in themselves or the stock market?
What ways do you think young people should invest in themselves or what experiences do you think will boost their return on themselves the most?