Should The Young Shun Investing?

RainydayHesiod, a Greek poet who was active between 750 and 650 BC, proclaimed the following: “I see no hope for the future of our people if they are dependent on the frivolous youth of today, for certainly all youth are reckless beyond words. When I was a boy, we were taught to be discrete and respectful of elders, but the present youth are exceedingly wise and impatient of restraint.

The debate here is not about all youth being reckless beyond words (I certainly do not agree with the sweeping statement) but rather by investing early, will a youth wreck his life? In this article, youth refers to someone between the ages of 16 and 24.

I do not think so. I believe strongly in people investing early. Here are some reasons why.

Meet Mister Albert Einstein

The famous Albert Einstein once said that compound interest is the “Eighth Wonder of the World”. He reportedly made this very powerful statement eons ago. Compound interest is the interest that accrues on an initial principal and the accumulated interest thereafter. Compound interest allows a principal to grow at a faster rate than simple interest.

Combining compound interest with time by starting young, a formidable force is formed.

To realise the power of the combination, let’s take a look at the following hypothetical example of two individuals – Smart Youth who started investing at the ripe age of 21 till the age of 31 and Reckless Father who only invested at the age of 31 till he hit 51.

Smart Youth Reckless Father
Age Started 21 31
Invest $100/month for… 10 20
With a 8% ROI, at age 65, the   accounts are worth $237,976 $161,294

At the age of 65, Smart Youth had amassed $76,682 more than Reckless Father, considering Smart Youth investing for only 10 years and stopped at the age of 31. This is the power of investing early.

The STI ETF (SGX: ES3) produced an annualized return of 8.6% since inception in 2002, including dividends. During the same period, individual companies such as Super Group Limited (SGX: S10) and Raffles Medical Group Limited (SGX: R01) produced higher returns at 32.5% and 26.8% respectively, without dividends. Therefore, the 8% shown in the example above is a realistic return on investment (ROI).

Accumulating Experience

By investing early, the young have an upper-hand over many of their peers who start later.

Let’s say Youth A is an investor who started investing at 21 but Youth B does not invest. When both reach 35, Youth A would have seen at least one full market cycle and learnt from his mistakes but Youth B would only have started off investing (hopefully).

Therefore, Youth A would make better decisions going forward and do his portfolio a huge favour as compared to Youth B who is just starting out. Stapling that to the power of compounding, Youth A will be miles ahead of Youth B when it comes to retirement age.

Moulds you as an Individual

A by-product of investing early is that one could become a better individual and it helps to widen his horizon. When analysing companies, he will be looking at the management running the business and how they do it well. He will be reading the insights of the management.

Also, communication and networking skills can be cultivated when the youth goes around the various businesses he is interested in investing in and talking to the stakeholders of the business.

All these will come in handy when the youth goes into the corporate world. He understands how businesses are run and what makes a business tick. He is able to communicate well with peers, subordinates and superiors alike. He will be able to deliver something to the employer, adding value to the company.

Foolish Takeaway

The benefits of starting to invest early cannot be overemphasised. Warren Buffett started investing at the age of 11 and he regretted not starting early. Start young and compound your way to a peaceful retirement!

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.  Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.