Investing Young Isn’t Best

Other Side of the Fence

by Ryan

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?

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{ 14 comments… read them below or add one }

BibleDebt March 28, 2010 at 9:53 am

Interesting way of looking at it from another angle. It can help convince you that it is actually better to invest early by asking the opposite question.

LeanLifeCoach March 28, 2010 at 8:46 am

You make great points about the value of investing in yourself. Kudos on throwing Dale Carnegie in the mix as well. I still have my pens!

However, I would disagree. As one that did not invest and understanding the that there are pros and cons to everything, the sooner you begin the more opportunity to have to learn. In retrospect I now realize that I could have not only invested more in myself but also invested some in my financial future and still had some (less but some) fun along the way.
.-= LeanLifeCoach´s last blog ..Lean – Life – Learn =-.

Joe March 28, 2010 at 8:48 am

Ryan, I completely agree. Another point to make is the fact that most young people these days are saddled with thousands upon thousands of dollars in student loan debt (not to mention any credit card debt they racked up in college). They are more apt to simply focus on relieving their personal balance sheets of this risk instead of investing. I’m in mid 30’s and I can’t imagine the opportunities I could go after if I had followed that path for the past decade and a half.

Experimently March 28, 2010 at 9:38 am

Definitely invest young.

The S&P 500 comparison you make is totally skewed by the way, you can’t compare the height of a dot com bubble with 2010 just after a big crisis. Also when you invest young, you usually invest over a longer period of time anyway so it’d turn out fine in the end.

There are always ways to get that little bit of extra cash, so that you can save it. It’ll pay off in the long run, which probably is the issue why so few people don’t start saving when they’re 20. They all look at the short term results, which all seem so much better than the long term ones. “I can get drunk all weekends, why would I save?” as an extreme example.

Don’t get me wrong though, investing in yourself is important too, but you don’t have to spend thousands of dollars for that. If you feel like you have to, well then you’re clearly doing it wrong. I believe in a balance between investing in yourself and investing in your fortune, one end of the stick is usually a bad idea in my opinion.
.-= Experimently´s last blog ..30 days rewind =-.

Daniel Johnston March 28, 2010 at 10:42 am

I certainly think investing in yourself is important, and definitely better than investing in the stock market, because you are your most valuable asset. However, I don’t see why you can’t do both. I don’t know why you think that young people necessarily always make a small amount of money and have little to spare. That is not always the case. Many young people make more than enough to invest both in my future and the stock market. Education should definitely be taken care of, though, before investing, but if you do graduate college with a degree, you shouldn’t have such money problems.

No matter when you start, there is always a chance of the market conditions being horrible. When I started, they were, but that did not deter me, and even in the latest recession, I actually made a nice return. Waiting will not necessarily make certain the market conditions are better when you first start. As long as you pick good quality stocks, you should do fine. It has been said that waiting for the perfect moment is a bad idea as it will never appear. I think that’s definitely true, especially since now, the market is pretty low, so there is actually more money to be made than if it was a great economy.

Although investing young can decrease your net worth, it isn’t only young people; it is at any age. And as I said before, as long as you pick good quality stocks, do a lot of research, etc. you should do fine in the market. Even during the recession, I actually made a great return by picking good quality stocks.

Education is the most important thing if you do want to go into a profession that needs education. Experiencing something within your line of work can definitely also boost your earning power. But if it doesn’t have a good chance of beating the stock market, then I think it’s just silly to not invest.

myfinancialobjectives March 28, 2010 at 11:42 am

You present a very interesting argument. Especially talking about how you could be investing in YOURSELF now and wallet later. However, I feel that you actually ARE investing in yourself if you choose to invest in the stock market. You just don’t see the money again until later. My goal in my investments to reach the tipping point as quickly as possible. This tipping point is where the amount of money you accumulate through interest exceeds your total contributions per year. That is when your wealth accumulation snowball really gets going.

On the other hand, I agree that experiencing as many things as you can while your young is so important. When you are young and have not done much, your naivete is much more evident. In addition, investing in your education is another great example of wise spending when you are young.

Meghan Fife March 28, 2010 at 3:42 pm

Well, as a young person (age 20), I don’t know a lot about investing in the stock market. But what I do know is that I’ve discovered I can do more things at once than I ever thought possible. How did I discover it? By purposefully pushing myself.

So…I’m doing both. For me, it’s not an EITHER I invest in myself OR I invest my money. It’s I invest in myself AND I invest my money.

I am continually investing in myself through reading (library is free and used books can be bought super cheap on Amazon and blogs are the BEST), saving for different experiences (vacations, concerts, etc.), and other various ways.

And I am continually investing my money. I am saving cash. I am investing a little bit in the stock market when I can and I will open up a Roth IRA this summer and my employee-sponsored 401(k) plan this fall when I am eligible.

Why not do both? With a determined heart and head and the smarts to create a unique budget that fits your lifestyle and goals anything is possible. I have money to invest for my future and I have money to invest in myself right now–all while not making the “big bucks.” =)
.-= Meghan Fife´s last blog ..Millions By 30 =-.

Derek Clark March 28, 2010 at 5:45 pm

I would suggest do investing money and in yourself as several people have mentioned. I would specifically say invest some time in learning how to invest. Read books on investing by lynch, buffet, possibly cramer, ben graham, etc. I would also suggest that learning the harsh lessons of investing early with small amounts of money could be more valuable than anything. You just have to keep an open mind and realize that you are paying for a lesson by jumping into the market and not get completely turned off if you lose a few bucks on your first try. My first investments didn’t do that great, but they taught me a lot and I have since done pretty well considering I started investing when the DOW was at 14k 3 years ago. The lessons I learned early with relatively small amounts of money were priceless.
.-= Derek Clark´s last blog ..Weekend Link Love – March 27, 2010 =-.

Mark March 28, 2010 at 6:29 pm

You make an interesting point about investing in yourself. I would agree that investing in furthering one’s education at an early age is wise, but only to the point that there is also something to invest as well. Some small investment is better than none at all.

Simple in France March 29, 2010 at 3:47 am

My ‘investments’ look something like a squirrels investments. Plenty of nuts, all randomly stuck away here and there. Sometimes I get on my own case about not getting a higher return on those investments. . .sigh.

But the stock market today gets me slightly off the hook as does the fact that my husband and I are looking to purchase a home in the near future with some of those ‘nuts’ we’ve tucked away in a safe place.

So, in short, your post allows me to rationalize my overly risk-adverse investing behavior. Thanks :)

Money Reasons March 30, 2010 at 1:55 pm

With all things in life, you have to start somewhere. I think it’s better to jump in young, learn your mistakes, then become a master of the subject area that you’re trying to learn.

I plan on helping my kids learn the ropes about investing. I’ve did some foolish trade in my life, but now I think I have a grasp around the field.

I plan on letting them fall a few times, that’s part of learning…

Of course, mutual fund or ETFs will be at least 50% of their accounts. Individual stocks will be a smaller part of their portfolio.
.-= Money Reasons´s last blog ..MoneyReasons Weekly Cache 2010, Mar 28 =-.

Darren July 9, 2010 at 9:33 am

I agree that if you’re young, perhaps spending money on your personal development and education may be a better investment.

But if you do invest, and it happens to be a bear market, maybe it’s not so bad. After all, you’d be buying the stocks cheap, and it you hold for the long haul, you’ll ride the wave back upwards.
.-= Darren´s last blog ..Social Security Benefits – The Six Categories Of Benefits =-.

Dave October 11, 2010 at 3:27 am

I like your series “Other side of the fence”! I never thought about investing young that way!
I started to earn some extra cash and I was wondering whether I should start investing (I am 24 years old).

Ryan, are you an investor?
.-= Dave´s last blog ..Your Best Asset to Wealth and Success =-.

Get Happy Life November 14, 2010 at 3:19 pm

Ryan, there is another reason not to invest young, I think. Maybe one should travel the world while still young and in good shape, because:

1) You may not know when your last day on Earth is
2) Having(spending) money today is better than spending it when you are 40 or more
.-= Get Happy Life´s last blog ..Saving Young or Travelling the World =-.

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