There are many advantages to start investing early in life. If an investor builds their portfolios in their 20’s or even 30’s, they can start wealth creation sooner. This TradingSim article will explain to investors the top 7 reasons to build a portfolio even if they’re new to investing in stocks.
Why do people put off investing?
The recent bear market has scared people from investing in the stock market. The recent headlines about the economic downturn could make people hesitant to invest. However, investing can be the best way to build wealth during a turbulent time in the stock market. Kelly Welch, wealth advisor at Girard, advises people to start investing early regardless of the current economic uncertainty.
“Timewise, you may wait for the market to settle down, but no one knows when or if this will happen with any certainty. But if you sit on the sidelines, you’re not in the game,” said Welch.
Here are seven reasons that starting investing early can be beneficial for wealth creation.
1. Starting investing early gives people time to build wealth
When people start investing early, they have extra time to wait out the volatility of the stock market. Financial expert Suze Orman says that new traders should invest in the VTI (Vanguard Total Stock Market) ETF. When investing in stocks vs. ETFs, ETFs, or exchange-traded funds can be a safer option for new investors.
“When the time is right, I would be dollar-cost averaging every single month with a specific sum of money into the ETF with the symbol VTI. And do it at a discount brokerage firm where there are no commissions whatsoever,” said Orman.
She recommends dollar-cost averaging for investing early. In dollar-cost averaging, investors put a set amount of money into a stock for a long period of time. Starting investing early with a set amount of money each month can help build wealth sooner.
Orman also recommends saving money when investors are younger. She contends that if investors start investing early, they won’t have to play invest more money when they’re older.
“I would much rather see you invest a specific amount of money when you are young, a lesser amount of money, than waiting and have to invest five or six times [as much] when you are older,” said Orman.
Orman also said that it doesn’t matter how much an investor puts in the stock market as long as they start early.
“The key isn’t the amount, the key is the time,” said Orman.
Compound interest helps increase profits
In investing, compound interest is a key reason to start investing early. By investing early, an investor can increase profits over the long run.
Albert Einstein noted that “ Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t … pays it.” Compound interest is the interest added to an investment’s initial capital and interest that accrued over prior periods.
Here are two examples of how investing early can pay off and increase compound interest.
Malcolm starts investing in a retirement account at 28 with a 7% annual rate of return. He invests $5,000 a year until he retires at 58. After 30 years, he has $150,000 in his account.
Janelle starts investing early at 18 in the same retirement account with the same 7% rate of return. She invests the $5,000 a year also until she retires at 58. After 40 years, she’s accumulated $200,000.
Because Janelle started investing early and kept faithfully setting money aside, she gained more income in retirement than Malcolm. While investments are volatile, a slow and steady investment can help to increase income regardless of what happens in the stock market.
Starting to invest early can help young people meet financial goals
If investors start in their 20s, they can take a small amount of money and make it grow. Anthony Pellegrino, founder of Goldstone Financial Group, notes that starting to invest early can even lead to an early retirement.
“The consequence of waiting to invest is significant”If you start investing when you’re 22 and average an 8% rate of return, you can save as little as 12% of your salary, including an employer match, and be ready to retire by the time you’re 62,” said Pellegrino.
When investors start investing early in their 20’s, they can reach financial goals other than retirement. Even if an investor wants to buy a home, investment income at an early age can help a trader reach that goal quickly. Daniel Hill, president of Hill Wealth Strategies, said putting money aside early can help investors achieve their goals.
“Typical thinking at this age is to wait, simply because they have time. While having time is true, I discourage my 20-something clients from waiting because the sooner they begin saving, the sooner they can obtain their financial goals,” said Hill.
“Shorter-term goals, like building a safety net or setting aside a down payment for your first home, should be invested more conservatively,” added Hill.
2. Investing early leads to automatic savings
Dollar-cost averaging and starting investing early can start with retirement accounts like 401ks. Robert Farrington, founder of College Investor, noted that automatic saving through is a great way to start investing early.
“The easiest way to get started investing is to do it automatically, just like a 401k. If you want to contribute the max to your Roth IRA each year, set up direct deposit from your paycheck to automatically deposit $192.30 (if paid bi-weekly) into your IRA account. Most brokers offer this option, but you can simply ask for the broker’s routing number and then your account number,” said Farrington.
Regular 401K contributions help build wealth
Graham Williams is the co-founder of Optimist Retirement Group and a financial expert. He advocates matching a 401k contribution from an employer to gain the most income from investments.
“Maximize your tax-deferred, employer-matched investment options first before investing in other options. The combination of dollar-cost averaging, tax savings and a potential employer match creates the ultimate compound interest machine,” said Williams.
If investors want to start investing early in a passive way, contributing to a 401k or other kind of retirement account is key.
Divam Mehta is a certified financial planner with Mehta Financial Group. He advocates that investors start investing early, no matter how little the amount.
The idea is to just get started,” Mehta says. “Allocate a fixed amount that will automatically be invested into an investment account from a checking account. Make it part of the monthly budget.”
3. It’s never been easier to start investing early
With trading apps like Robinhood, it’s never been easier to invest. If new investors are unsure of where to begin, they can start with value stocks with reliable returns. Robinhood co-CEO Baiju Bhatt notes that the app has made it convenient to start investing early.
“It’s really more convenient for people to have one app on their phone that is the go-to for that activity. We see an opportunity as we add more services and features to Robinhood to really be on that one app for all customers’ finances,” said Bhatt.
With investing apps, Bhatt feels early investors can feel that they are more in control of their finances.
“We’ve seen a major paradigm shift for broader financial services. People that previously didn’t feel like the markets were for them are for the first time feeling a sense of inclusivity,” said Bhatt.
With the stock market crash of March, many traders felt it was a good time to buy the dip and purchase stocks at rock-bottom prices. There was also an increase in early investing because of the government stimulus checks that were issued this past spring.
Tim Welsh, founder and CEO of wealth management consulting firm Nexus Strategy, also notes that the increased government income helped new investors. He also noted that Robinhood and other trading apps lowered the barrier of entry to making investments.
“The access to trading, there are no barriers to entry anymore, its on your phone, you can buy whatever you want, fractional shares are available so if you can’t pony up $1,400 to buy one share of Google you can still own the FANG stocks,” said Welsh.
Financial experts notes growth of trading apps in starting investing early
Citi chief U.S. equity strategist Tobias Levkovich wrote in a note to clients that there was an increase in “new investors who sense a generational-buying moment but do not have much background in the equity space.”
Levkovich also wrote about traders started investing early in tech stocks like Apple (NASDAQ: AAPL).
“We have heard anecdotally about younger individuals with less market experience viewing the March plunge as a unique time to start portfolios and often crowding into the tech arena, purchasing the stocks whose services or products they know and use,” wrote Levkovich.
Acorns lets people use spare change to start investing early
In addition to stock trading apps like Robinhood, Acorn is another app that lets people start investing early. In contrast to Robinhood offering stocks to trade in a volatile stock market, Acorns takes a more subtle approach. For people who want to start investing early, they can take as much little as a dollar a month to micro-invest in ETFs. New investors can even take spare change from purchases to invest in the stock market.
Noah Kerner, CEO of Acorns, noted that it’s important for young people to start investing early and to learn from the current economic downturn.
“Take in what’s happening right now, and don’t forget it. When the dot-com bubble happened … and when the Great Recession happened in 2008, everybody felt it. And everybody said the same things: ‘This is unprecedented. I’m never going to forget this moment. ‘And then time passes and people forget,” said Kerner.
Kerner also wants new investors to buy stocks while they’re at affordable prices.
“When there’s a sale in fashion, people go and buy things. When the market is on sale for 30% to 35%, that’s when you get in,” said Kerner.
Kerner also advises people who start investing early to set aside money consistently.
“Invest regularly. No matter what, even if it’s a very small amount, try to keep going. That’s why we focus on spare change. Just try to do a little bit so that you can keep the momentum going and you can keep benefiting from compounding,” said Kerner.
Stash another app that enables early investing
Stash is another app that lets people micro-invest to start investing early. A Stash spokesperson spoke about the company’s mission to help people who are starting investing early.
“The intention was, and continues to be, focused on customer growth, brand awareness, and to help reach more Americans who need our help in creating a better life, no matter their network or net worth,” said the Stash spokesperson.
Brandon Krieg, Stash’s co-founder and CEO said in a statement that Stash wants to help people who want to start investing early.
“We are very fortunate to bring together world-class investors, to help accelerate Stash’s goal of bringing digital banking, investing plus financial education and advice to the millions of middle-class Americans working hard every day to make ends meet,” said Krieg.
“This massive group has attempted to make financial progress within a system that simply does not serve their best interests or meet their needs. It’s time for them to reconsider the current financial servicing industry as the ‘status-quo’ and take control of their financial life with the customer-obsessed solutions we provide at Stash,” added Krieg.
Stash’s success leads to partnerships with large-scale investors
Because Stash has increased its customer base, it’s partnered with Lending Tree to help people start investing early. Lending Tree CEO Doug Lebda, Founder and CEO of LendingTree, touted its partnership with Stash.
“Stash’s mission to help Americans achieve financial progress is complementary to ours in every way, and we’ve been impressed with Stash’s speed of execution and commitment to positive customer outcomes,” said Lebda.
“The focus on meaningful financial progress is so relevant, especially in today’s economic environment which has only been amplified by the current pandemic. Giving customers a way to make real strides in achieving financial security is incredibly powerful to our combined missions.”
Robinhood, Acorn, and Stash are just some of the apps that make it easier for people to start investing early.
4. Starting to invest early can lead to better risk management
If investors start investing early, they can handle the risks of investing better. While younger investors shouldn’t buy stocks without thorough research, stocks that are popular growth stocks with potential can be lucrative.
Since young investors are buying stocks on Robinhood, CNBC’s Jim Cramer approves of some of the risks that they are taking. He especially thinks it makes sense to start investing early in stocks like Tesla (NASDAQ:TSLA) if people are financially able to pick the stock.
“If you’re a younger investor, it makes a ton of sense to bet on the only car company that’s so popular it doesn’t need to advertise,” said Cramer.
Starting investing early can pay off if they buy cheap or relevant stocks
Cramer also approves of early investors buying stocks when their prices tumble, like American Airlines (NYSE:AA). Buying stocks when they are cheap can pay off if the stocks eventually rebound.
“This is another one where I get the temptation. The stock’s down close to 70% from its highs. It’s a big bounce-back candidate if the government bails out the industry — and we always bail out the air industry,” said Cramer.
In the wake of COVID-19, many young investors also poured money into pharmaceutical stocks. One investor, Rodney Henderson, invested in medical stocks because of the potential of drugs to treat the coronavirus.
“While the coronavirus was happening, I think the biggest uptrend in stocks that was going on was in pharma. A lot of companies that are going to improve our lives after the coronavirus,” said Henderson.
Drugs like Moderna could potentially be a treatment for COVID-19. Because of the experimental vaccine’s potential, Jefferies analyst Michael Yee said the stock is a buy for new investors.
He said the valuation of Moderna could be “$35B[billion] on MRNA[Moderna] if it does have a novel mRNA platform that generated a COVID vaccine in less than a year would be worthy of praise, in our view”.
“We believe the[Wall] Street will be surprised to the upside if the Covid-19 vaccine works, gets approved by early 2021, and there are multi-billion dollars of purchase orders from USA and around the world,” added Yee.
When starting investing early, investors can pick stocks with more volatility. They can take more risks because they will have more time to recover any losses.
5. Starting to invest with established stocks can lead to more income
If starting to invest early, trusted tech stocks are a strong option. Lindsey Bell, chief investment strategist at Ally Invest, advises people who start investing early to pick stocks that they’re familiar with, like Google (NASDAQ:GOOG).
“If you’ve never invested in the market before, you should ease into it. You’ll need to get used to it before you feel comfortable with the up and down swings the market can make. Invest in something you understand,” said Bell.
Citi’s main U.S. equity strategist Tobias Levkovich noted that many young investors are buying tech stocks that they know. They have been purchasing the stocks since the quarantine.
“We have heard anecdotally about younger individuals with less market experience viewing the March plunge as a unique time to start portfolios and often crowding into the tech arena, purchasing the stocks whose services or products they know and use,” said Levkovich.
Financial experts advise people to do research before starting investing early
Many financial analysts advise people to conduct research on companies before starting to invest early. John Paul Engel is president of Knowledge Business Consulting. He wants investors to invest in companies that have strong profits and balance sheets.
“Look for a company out of favor that has significant assets, not on its balance sheet. For example, a company with a lot of patents, or a company with a lot of real estate,” said Engle.
“Also before everything else I always consider the management of a company. If the team has a history of success chances are good they will be successful in the future,” added Engle.
Diversified portfolio pivotal to start investing early
In addition to investing in stocks, financial experts advocate having a diversified portfolio. When starting to invest early, people should choose a wide variety of stocks to build their portfolios. Rob Cavallero, chief product officer at RobustWealth, said young investors should invest in a variety of stocks.
“One big mistake to avoid as a 20-something investor is holding concentrated positions in trendy investments. During the dot-com bubble, investors chased expensive internet stocks, and a lot of people got hurt. Stick with a diversified portfolio of low-cost funds invested in conventional asset classes, at least initially,” said Cavallero.
Amin Dabit is a certified financial planner. He advocates people who start investing early have a mixture of stocks and bonds in different industries. Dabit says a diversified portfolio will help shield new investors from large losses.
“During a bull market, it can be easy to forget that the market delights in surprises. The best safeguard against market cycles, while still benefiting from the upside, is through committing to a well-diversified portfolio and long-term focus,” said Dabit.
What should new investors have in a diversified portfolio?
While there is no set age, there should usually be an allotment of assets investors should add based on age. For younger people ready to start investing, there is a certain percentage favored by Dan Egan, a financial advisor. Egan is Betterment’s director of behavioral finance and he recommends they predominately invest in stocks and some bonds.
“For long term goals, those with time horizons over 20 years or more, we recommend setting your portfolio to 90% stocks and 10% bonds,” said Egan.
Lacey Cobb, director of portfolio management at Personal Capital, wants people to start investing early with a large portfolio of a wide variety of stocks.
“A good rule of thumb is to own at least 30 stocks. We also generally suggest people avoid allocating more than 4% of their portfolio to any single stock,” sais Cobb.
Egan also advises investors to diversify their portfolios with international stocks to possibly increase returns.
“It’s important to include international stocks in order to benefit from growth overseas, especially when it happens while the U.S. stagnates,” said Egan.
“While the U.S. stock market currently makes up approximately 50% of total market capitalization, international stocks and bonds are playing an increasingly large role in portfolio investing as more and more economies grow to maturity around the globe,” added Egan.
BetaShares CEO Alex Vynokur said that if new investors want to take risks, they can focus on stocks in two specific industries.
“If you want growth, up to half of your equities portfolio should be invested in growth opportunities, and this means technology, where opportunities can be found in a combination of global technology leaders. I also think a growth portfolio can include investments in other sectors, such as healthcare,” said Vynokur.
By starting investing early in established value stocks and a diversified portfolio, investors can have a good start to their portfolios.
6. Starting to invest early leads to patience and profits
When starting to invest early, new investors can learn that patience can pay off. Andy Garrison, senior wealth advisor with Mariner Wealth Advisors says it’s crucial to invest now so people can have less financial stress late on in life.
“Don’t waste time trying to pick the next Apple; just get money invested. The big picture is if you start investing now, you may be able to work a lot less over your life because you’re letting your money do the heavy lifting over time,” said Garrison.
“Treat your investment account like an angsty teenager that needs some time and space to grow. It might act up from time to time, but in the end, it’ll all work out,” added Garrison.
Investing early means that you don’t have to time the market
When investing early, many people want to try to outsmart the market to try to make a bigger profit. However, it’s unwise to try to time the market and guess what will happen next to get short-term gains.
Tyler Gray is a financial advisor at SageOak Financial. He advises against trying to outsmart the markets and to choose stocks based on long-term returns.
“Don’t try to time the market — you will not succeed. It is impossible to understand, take into account and predict all of the forces that affect short-term market movements. Instead, stick with winning long-term investments that you carefully and methodically research,” said Gray.
Princeton University professor Burt Malkiel noted it’s impossible to predict what will happen in the stock market.
“Nobody, and I mean nobody, can consistently predict the short-term moves in the stock markets,’ said Malkiel.
Malkiel advises people who start investing early stay in the market for the long-term.
“There’s a lot of people who get it right sometimes. But nobody gets it right consistently. Don’t try to time the market. You will get it wrong. Ride things out. Be well diversified,” added Malkiel.
Millennials saving more as they start investing early
While many think people who start investing early are irresponsible, many millennials are investing and saving more money worldwide. In Australia, BetaShares CEO Alex Vynokur notes that more young people are investing early and saving more money as a result.
“But what we found particularly interesting is seeing a younger demographic buying throughout the crisis – both as the market is falling and also on the way up,” said Vynokur.
“Many are investing either once a week or once a month and it’s been interesting to see how this demographic, which is generally Millennials, are displaying a lot more discipline than people traditionally have given them credit for,” added Vynokur.
Financial experts advise long-term strategy to start investing early
Tim Welsh, president of Nexus Strategy, advocates that investors buy stocks and hold them. He thinks that selling stocks in a panic is not best for people who start investing early. Welsh advocates people who start investing early to have patience with their investments.
“There’s buy and hold for a reason and anyone who’s inexperienced and is just clicking around and buying and selling based on the movements in the markets on a daily basis really have no chance to be successful,” said Welsh.
Philippines-based COL Financial services CEO Dino Bate advises young investors to stay the course when they start investing early.
“Investing in the stock market is really for the long term — it’s not a get-rich-quick scheme where you make money overnight. It’s buying good quality companies that will grow your money as they grow their businesses,” said Bate.
When people start investing early, they can learn to have more discipline and patience to withstand economic volatility and increase their wealth over the long run.
7. Starting to invest early can lead to early retirement
Investing early can have another benefit in a shorter time-an early retirement. With estimates saying that people need $1 million to retire, investing early can help people have more financial freedom.
For some young people, the FIRE( financial independence, retire early) movement is an enticement to start investing early. Many people have found success by making wise investments to retire early.
While the FIRE movement may not a realistic goal of every investor, if investors put extra money into their portfolios sooner, retiring comfortably could be a result.
Starting investing early can help start FIRE
Jackie Cummings Koski is a single mother who retired a millionaire after maxing out her retirement account contributions. While saving or investing half of her income to retire isn’t for everyone, Koski said investing early helped her achieve financial freedom.
“You’re not going to be saving or investing unless in your mind you believe it will make a difference. It may take a while to really get your head around things like me, but it happens, and when it does, it is very, very powerful,” said Koski.
Chris Mamula is a FIRE advocate who says that investing as much as they can if they want to retire early.
“50-50, stock-to-bond portfolio probably won’t work because you have such a long timeframe and need to account for inflation,” said Mamula.
Money expert J.P. Livingston also stresses that starting to invest early is crucial. She also advocates contributing the maximum amount to workers’ 401k’s to build wealth in addition to cutting spending.
“At some point, your money pile grows to a size where focusing on growing your nest egg will have a much more material impact to your net wealth than further reductions on your spending,” said Livingston.
She also said that when investing early, it’s important to pick investments that can gain income in a tax-exempt 401k.
“Ideally, the investments that must actually realize gains and income (for example, selling options, getting dividends that aren’t tax-exempt) should go in the tax-advantaged accounts,” said Livingston.
Investing early can lead to financial security in crises
When people start investing early, they’re able to weather any economic emergency. FIRE advocate Steve Adcock and his wife Courtney investing as much of their income as they could. Because of the increased early investments, the Adcocks were able to have enough saved during the recent recession.
“Since we’ve quit our jobs so early in life, we felt like having the extra cash outside of investments was a great way to reduce risk during recessions and other market collapses,” said Adcock.
“In fact, we lived off of that emergency fund during the COVID-19 market crash in March and April so we didn’t need to sell even a single share of stock to maintain our standard of living,” added Adcock.
If early investment is a goal, then starting investing early is a must for people who invest in stocks.
Low-cost index funds can help people who start investing early
Many FIRE advocates investing in index funds as a way to passively grow income. When people start investing early and want to retire early, low-cost index funds are a key low-risk investment. Low-cost index funds are mutual funds that usually track the S&P 500. Noted investor Warren Buffett also recommends low-cost index funds for early investors.
“Consistently buy an S&P 500 low-cost index fund. I think it’s the thing that makes the most sense practically all of the time,” said Buffett.
Derek Horstmeyer is an associate professor at George Mason University School of Business. He said that if people start investing early in low-cost index funds, they can be an efficient way to earn more money.
“Index funds are still the best bet in this terrible roller-coaster environment. The single greatest factor in long-run returns for a fund are the fees paid,” said Horstmeyer.
“With index funds now with expense ratios down at close to zero, this is still far better than any actively managed fund. Further, active management notoriously does poorly in volatile periods since they are bad market timers – this is another reason to stick with indexers,” added Horstmeyer.
Starting investing early is key to financial freedom
While starting investing early in this current economy seems risky, it’s actually a safe way to handle money. By putting aside money in stocks, index funds, or 401ks, investors can build a portfolio that can help them have a safe financial haven. With just a small amount to invest, people can start a path to building wealth.
With TradingSim’s blog and access to practice simulated trading strategies, new investors can make the best stock choices for them. When people start investing early with the best information available to them from TradingSim, new investors can begin on their path to financial independence.