Money is an excellent servant but a terrible master. This blog explores why investing from an early age allows you to get assets working for you, not against you.
The earlier you start, the greater your risk tolerance
An investor who starts at a younger age is afforded the luxury of being able to ride out market volatility. Investments that yield the highest returns often do so with greater amounts of volatility along the way. Younger investors can ride out these periods of volatility.
Someone who starts investing later in life generally has a lower tolerance for risk as the period of time before they will require the capital again is much shorter. Because of this, market volatility can lead to losses if an investor attempts to withdraw their wealth at the wrong time. Unfortunately, those who invest later in life are often playing catch up, which leads them to take on more risks.
Habits take time to build-up
In the early stages of your career, you may have the desire to begin investing, but you may feel that you lack the liquidity. However, even if you, like most of your peers, are living pay-cheque to pay-cheque, you should look to be putting away a small sum each month.
Aim to put away at least 5% of your pay-cheque each month into a savings/investment account that is not directly linked to your current account. Fund this account every month as soon as you get paid and leave it alone. Developing the habit at this stage of your life is far more important than the size of the sum you’re saving. However, despite the fact the amount will often seem small, over time this amount can grow significantly, which leads us nicely onto the next point…
The incredible power of compound interest
Compound interest, also known as the snowball effect, is the growth achieved on growth. Imagine a snowball sitting at the top of the hill. When the snowball begins to roll and gather more snow, this extra layer of snow is the growth.
The larger the snowball gets, the more snow it can accumulate. The same laws apply to the growth of your portfolio.
Investing carries risk; not investing carries greater risk
Investors who start at a young age before taking on the major responsibilities of life, including parenthood & homeownership, learn valuable lessons. Investing comes with inherent risk. However, as most seasoned investors agree, the greatest risk is not investing.
Those who choose not to invest, store and hold wealth generally in cash accounts which come with an annualised guaranteed loss of 3% from inflation. Investors who start at a young age are able to visualise the power of financial markets and the rewards associated. Young investors who invest prior to parenthood, invest generally with less fear, and in doing so, they learn valuable lessons and continue to invest throughout their life rather than avoiding it due to fear of loss.
The jury is, and always will be, out over whether or not money makes you happy. However, what most people do agree on, is that an absence of money creates stress. Long term build-up of stress has deeply negative effects on a person’s health. Goldman Sachs recently produced a report noting the health benefits of robust financial planning.
Investing earlier in life allows people to avoid many of the stresses associated with money. This peace of mind can, in many ways, can be more valuable than the money you have accumulated itself.
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