Simply saving money earned through employment may not be enough to retire at the age one would like to. It's important to start investing as early as possible and to take actions that will maximise the growth of one's wealth over time. While most people think about investing for the purpose of retirement, successful investors can also use gains to supplement the income from their jobs on a regular basis. Here, we've laid out some key tips for adventurous young adults to consider as they dip their toes into the world of investing.
Start Early, Even If It's Small
Time is one of the best friends you can have in generating growth. This is due to the concept of compounding returns, which helps one's money earn more money exponentially over time. Consider our example below. We compare two people who invest $10,000 with no additional investments and earn a return of 10% per year. The key difference is Person 1 begins investing at age 20, while Person 2 begins at 30. By age 65, Person 1's investment would more than double that of Person 2 thanks to the 10-year head start. To quote Warren Buffett, "the best thing you can do for your retirement savings is to start investing early."
Due to the effect of compound returns, millennials and Gen Z'ers in India (and anywhere) should do their best to start investing as early as possible, even if it's just a small amount. In addition to the power of compound returns, early investing can help one learn from mistakes, which are less costly when one has time to make up for them.
Contrary to the belief that conservative investing is the best way to increase wealth, we believe young investors should invest aggressively. One method of doing so is exploring international markets to find investments with the greatest potential. Another is to use leverage (wisely) to boost their returns, a concept which is worth expanding upon.
In a study, Scholars at Yale University concluded that "by employing leverage to gain more exposure to stocks when young, individuals can achieve better diversification across time." Since most people have much more money invested when they are old, they are consequently heavily underinvested when they are young. Due to the historical success of the stock market decade after decade, it's better for any individual to have significant investments for a long time. Therefore, it actually is advisable to borrow to invest in stocks (use leverage) while one is young and doesn't have as much cash available to put in the market. Know that it must be done carefully, so check out our guide for more detail on how leverage works.
Consider Options Beyond Traditional Financial Advisors
A classic rule of investing is to only buy what you know. This means one has to understand what an investment is truly worth. Instead of pondering "will Apple's stock go up in the next year?", more important questions are "how does Apple make money?," "how defensible is its earnings stream if competitors try to take away Apple's market share?" and "what should Apple be worth in the long-run (decades from now)?" It's important to learn as much as possible about the individual stocks, bonds and ETFs one is purchasing and make intelligent decisions based on sound logic. How much are you paying? How much can you earn if you're right? How much money can you lose if you're wrong? "Do-It-Yourself" shouldn't just apply to home improvement!
Since this can be a pretty steep learning curve (though well worth climbing), some may be tempted to blindly follow recommendations from traditional financial advisors. While many are very good, they can also be expensive. Also, it's useful to understand how they are paid. If they are compensated by just selling you different funds and stocks, their incentives are not necessarily tied to helping you make money. So, it's important to make sure you trust that your financial advisor has your best interests at heart. As a possible alternative for novice investors not yet comfortable picking their own stocks, consider robo-advisors. They provide investment diversification but charge much lower fees. Just know that removing humans from the investing equation is still a relatively new frontier, so make sure to research any potential robo service sufficiently.
At the end of the day, investing is meant to make us money. For this to happen, the most important element is picking the right investments. Since doing so is a learning process, it's best to start the effort early, while you still have a lot of time left. This let's one get over small mistakes most easily while allowing time to create wealth for you.