Starting to invest at a young age yields the highest results, but young people aren’t always in a position to invest. They might not be educated about the benefits of investing young or have the funds to get started. Or they simply don’t have the life experience that often triggers introspection and good decisions.
If I could go back in time and give my younger self some tips to get started with investing, I would now have a lot more money in my portfolio. These are three I would share.
1. The earlier you start, the more you’ll end up with
This is obvious, but there’s a deeper meaning because of the magic of compounding. So while clearly each year you invest adds up, over time it adds up exponentially, making every year count that much more. In fact, it’s the money you put in earlier that produces the most returns down the line, since every year compounds it even more.
For the simplest of examples, consider an investment in the benchmark S&P 500, what’s often considered a stand-in for the overall market. The average annual return for the index over the past 30 years was 10.7%.
If you invested $10,000 20 years ago and added $100 every month, you’d have around $150,000 today — a tidy sum.
However, let’s say you started 10 years earlier than that. Over 30 years, it nearly triples, to $436,000.
That’s the power of compounding over time.
People have all sorts of reasons (or excuses) for not getting started. You might be finishing school, or working outside of school just to pay tuition. You might have married young and are starting a family, and that takes all of your time and brain space.
All of these are valid reasons, but you can’t turn back the clock and get the benefits later. It’s possible to start at any time, however — and starting early generates the best results.
2. Find a portion of your income to invest
The corollary to not having the time or the brain space to think about investing is not having the money. When you’re working toward buying a home and paying for tuition, whether for yourself or your kids, and then paying for the myriad of life expenses like gas, food, sports gear, and the like, it’s hard to do anything else besides make it all balance out at the end of each month. If anything, many families wind up in the red and are trying to work out of that.
At the same time, many families can find ways to cut some short-term expenses for the long-term benefits of putting money away. The first thing is to pay off debt and put money away for emergencies.
You might consider cutting out spending on takeout or one of your streaming subscriptions. Even if it’s only $50 a month, which could be the cost of a family dinner at a restaurant, you’ll enjoy the sacrifice later on as the returns compound (see above).
I made my first investment straight out of college, and I contributed the fullest amounts in my 401(k) plans at work. But then I got married and started a family and let years go by without thinking about my portfolio. If I could do it again, I would add to it consistently.
3. Don’t sweat the short term
Actually, I got this one right, if only by accident. For the same reasons mentioned above, I didn’t take an active role in my stock portfolio for years. I’m not sure I even noticed the market exploding during the times I was changing diapers all day and holding crying babies all night.
The good part is that I had zero inclination to sell when the market tumbled — several times — over that period. Because I didn’t check and wasn’t sweating it, not only wasn’t I worried about my investments, but I also didn’t panic sell.
Over the past year as prices fell, many investors sold their stocks, and when there’s panic selling, it’s almost always at a loss. The worst fallout from that affects retirees who sold, and who will need that money (or the passive income, in the case of dividend stocks) to live off. But if a bull market is here, or on the way, much of the value of those stocks can come back. Many stocks have already recovered.
If you have a long time horizon, take these tips and make them an active part of your portfolio planning. You’ll thank yourself in a few decades.