3 reasons you need to start investing in your 20s
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Millennials are skittish when it comes to investing. According to a UBS Investor Watch survey conducted in early 2014, millennials (defined as people between the ages of 21 and 36) only hold 28% of their assets in stock, compared to the 46% of assets in stock held by non-millennials. Only 28% of millennials believe that long-term investing is an important path to success, compared to 52% of non-millennials. Millennials are also far more likely to place importance on working hard and "being a go-getter" when it comes to achieving success.
On the surface, this thinking may seem safe. In reality, however, millennials are putting themselves at more risk by not investing in the market. This may seem counter-intuitive to some who experienced the recession early in their career, but history shows that the market, over time, consistently grows year over year. Continue reading for the three biggest reasons we think millennials need to start investing ASAP.
This might be weird to think about, but it’s the truth: cash loses value over time. If you put $10,000 in a savings account today, that same $10,000 won’t mean the same thing in 40 years. In essence, you are losing money by not doing anything with it.
Since 1913, yearly inflation has averaged out at about 3.24%. Add in the beauty of compound inflation and you’re looking at prices doubling every 22 years. If you’re leaving money under your mattress or in a safe, it would lose almost half of its value in just 20 years.
Even if you had your money in a savings account, it would need an interest rate of over 3% just to catch up. Unfortunately, the average interest rate on US accounts is 0.06%, significantly lower than inflation. Even high-yield savings account top out at around 1%.
While most financial advisors would agree that you need at least some money in liquid assets that be accessed easily, it should be a small minority compared to the rest of your assets.
People see the market crashing and assume that it’s riskier to invest than just hold on to their money. But the fact of it is a smart investor doesn’t need to worry about market crashes. We talked to Chris Nicholson from FutureAdvisor about market risk:
If you’re in your 20s, and you invest in the stock market and it crashes, you don’t have to realize those losses. You can just ride it out. If you invested at the stock market peak of 2000 and fell asleep until 2002, you would’ve ended up with 150% of what you started with. And there was a huge crash in-between. Most people lost about 60% of their money.
There’s a really simple reason you don’t have to worry about a market crash: you don’t need the money. The only way you actually lose any money is if you take your money out of the markets. But if you hold on and wait for the markets to recover, you’ll end up with more money than you started with.
Did you ever actually lose any money? No! You only would’ve lost money if you had cashed out when the markets were low. To put it in another way: you don’t care what the market looks like over the next few months. You care what it looks like over the next few decades.
According to Patrick O'Shaughnessy at Millennial Invest, each dollar you invest at age 22 will be worth over $17 at the time of your retirement. That’s a huge increase and is an impressive amount of growth. You might be thinking to yourself, "Okay, but if I invest when I’m 30, I’ll still make a bunch of money before I retire." You wouldn’t be wrong, but instead of making $17 for every dollar you invest, you’ll be making $10. And if you wait until age 35? $7 for every dollar you invest.
Chris Nicholson from FutureAdvisor again:
Get exposure to the market. The market on average has grown about 6% per year for many many decades. And then really, the real answer is: fall asleep. Just let that run. That’s growing much faster than inflation. Studies have shown that people who invest every year starting in their mid-twenties to their mid-thirties accumulate more wealth by their late sixties than people who invest many times as much starting in their late 30s. That 10 to 15 year advance you get has all the magic of compound interest. It just puts you way ahead of the pack.
If you’re still stuck in the idea of keeping all of your money in a savings account, think of this: with interest, your $10,000 savings account fund is likely to only grow to $20,000 over the course of 45 years. Compare that to $170,000 if you’d invested that money, and, well, there’s no real comparison, is there?
We’re glad you’ve come around. Check out our guide for beginning investors, "How do I invest my first $1,000?"
Have more reasons to start investing early? Put them in the comments! We love hearing from readers and want to hear your thoughts.
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