Your Investments: Start building wealth when you are young

"Many young people put their savings in the bank, where it makes zero interest; How will they be able to afford paying for their children’s weddings in 20 years’ time if their savings do not grow?"

By AARON KATSMAN

MAY 13, 2015 22:44

A pedestrian looks at an electronic board showing the stock market indices of various countries outside a brokerage in Tokyo. (photo credit: REUTERS) — A pedestrian looks at an electronic board showing the stock market indices of various countries outside a brokerage in Tokyo.

(photo credit: REUTERS)

“Forever young, I want to be forever young Do you really want to live forever? Forever young.” – Alphaville

When you are young it’s difficult to think about the future. If five to 10 years may seem like an eternity, it’s hard to blame 20-somethings for not thinking about 30 to 40 years down the road. For my regular readers it may seem like I am on some kind of mission to get young adults to invest.

Last week I wrote about how newly married couples should learn proper financial habits from the get-go, so that once the expenses of a family start piling up, they will have developed good financial habits. This week I want to focus on the importance of investing earlier rather than later, and how you will be doing yourself a huge favor if you start investing now, as opposed to waiting until you are 45 to 50 and then need to scramble to play retirement catchup.

Don’t wait

“The stock market is trading near all-time highs, and I don’t make a huge salary. Why should I risk losing my money by investing?” This is a frequent question that I hear from young people.

People delay long-term saving because they don’t really understand investing, and they are struggling to become established on a career track. Unfortunately the dirty little secret is that delaying retirement investing is a mistake. There is a lot of data in the US that workers in their 50s have only managed to save $50,000 for retirement. That’s not going to get them very far once they stop working. Ask these people what their one financial regret is, and I am sure that they will answer that they started saving far too late in life.

Afraid the market is going to crash? The most important aspect to building wealth is to start a consistent savings plan.

Pay yourself first, as financial planners say. Early on, saving money has more impact than your investment return. This is because your nest egg isn’t very large yet, and market swings have only a minimal impact on the total valuation. For example, if you have $7,000 in your account and the market drops 10 percent, your portfolio value will decrease by $700. However, if you save $500 a month, you would be down only $200 and your portfolio balance would drop less than 3%.

Keep in mind that the stock market doesn’t fluctuate that much, and your monthly contribution will usually be more than any swing in the market. It will take some time before your investment return will severely impact your portfolio more than you increase your net worth from the contributions.

Market drops are good?

No one likes it when the stock market drops, but for young investors there is a silver lining to a falling market. Yes, the stock market is at an all-time high, and it can be unnerving to jump in. But even if the market goes through a correction, you will benefit over the long term. By saving money every month, you are dollar-cost averaging in. When the market declines, you’re buying more shares at a cheaper price. Historically, the stock market does very well over the long term, so picking up shares cheaply can be a big benefit.

Getting started

Many young people put their savings in the bank, where it makes zero interest. How will they be able to afford paying for their children’s weddings in 20 years’ time if their savings do not grow? Get your money to work for you now. Either go online and research how to start investing, or speak to a financial adviser who can help you draw up a long-term investing plan.

Increase your chance for financial success, and start building your wealth now. You will thank yourself for that decision in a few decades! The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.

aaron@lighthousecapital.co.il

Aaron Katsman is a licensed financial professional in Israel and the United States who helps people with US investment accounts. He is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.