Experts are divided about which way the markets will go. They often are.
Some say the markets are so high that you should sell everything and stay in cash. Others say you should bide your time and buy the dip. And then there’s a third group which says ignore the ups and downs and invest regularly no matter what.
I’m in my late thirties and even after a decade of investing, I struggle to work out what to do. But it’s even harder for younger people, taking their first steps in investment at this tricky time. I can’t tell anybody the future. But I can tell you what I wish I had known at 20.
1 Compounding makes us richer if we invest early — very early
The best way to illustrate the power of investing early is with an example, which even some people familiar with compound interest may find surprising.
Consider two investors, Ben and Lucy, who are the same age but start investing at different times.
Let’s assume they both earn a 10 per cent nominal rate of return, in an example originally used in the 1950s by investment writer Richard Russell.
Lucy starts investing £2,000 a year through her Isa at the age of 19 for seven consecutive years. From the age of 26 she invests nothing until the age of 65.
She has a total of £14,000 invested. With a 10 per cent average annual return, her net gain will be £930,641 at 65.
Ben, on the other hand, starts late. He invests £2,000 a year from the age of 26 until he turns 65, a total of £80,000. His net gain at 65 will be £893,704.
Notice that although Lucy only made seven contributions and stopped investing, she ends up with a larger net pot of money than Ben, with 40 contributions.
Her money multiplied 66 times (£930,641 divided by £14,000) compared to the 11 times (£893,704 divided by £80,000) that Ben’s money multiplied.
This is a startling example of compounding.
2 The penny has power
I wish I had understood earlier that everything begins with the penny (or cent) in my life. That is, the spare cash in my pocket could be invested.
There is a misconception among young people that you need lots of money to start investing. I could have started very small with about £20 to £50 a month.
I wish I understood earlier that if I had looked after the pennies, I would be able to look after the pounds as I earned more. It sounds obvious, but remains a challenge for many. Research shows that nearly 50 per cent of UK adults need help managing their day-to-day finances.
3 The real cost of spending money
In my early 20s, I spent most of my savings on a flashy car. It was my biggest financial mistake. It not only cost me by way of attracting the wrong — high-spending — company, it set me back for the future.
I wish I had understood that every £1 spent on a wasting asset costs me much more in future potential income — for example, £2 after 10 years (assuming a 7 per cent return).
The lost opportunity is often forgotten.
Today though, I see the power of making the right decision through the eyes of my children, aged 7 and 9, who are learning to invest through their own Junior Isas.
Although they also spend pocket money, we’re figuring out interesting ways of helping them to understand the power of letting money multiply over time.
For example, I involve them in choosing what to invest in, which increases their curiosity on the resulting gains (or losses).
Something about seeing their money grow overall encourages them to put aside a portion of their money to grow some more.
4 The investment path you choose matters
Growing up in my 20s, all I heard people talk about was “trading”. So I had a go and I made money, but also lost a lot.
I wish I had understood that I could reduce my investing risk (and improve performance) by choosing a passive investing strategy for the long term.
Low fees, coupled with diversified trackers, have served me well in the past decade.
What about bitcoin, you might ask. It’s true that a slow and steady approach involves missing out on some tempting-looking speculative bets. But, as the most recent crypto sell-off shows, success isn’t guaranteed. However, if you insist on a bit of a gamble . . .
5 Give yourself a bit of space for a flutter
It’s OK to invest a small piece of your pot in something emotional, such as joining friends in the rush for crypto, if you must.
But it’s perhaps better to make your emotional investment in a company where you love what it does or what it stands for — even when the financial fundamentals don’t necessarily make sense.
In 2017, I bought the Tesla stock because I loved the direction of the electric vehicle industry and the energy of the company and its founder Elon Musk.
However, I sold too early after listening to other people and forgot the core reason why I invested. Tesla has done exceptionally well since I bailed out. If I had focused on my core emotions, I’d still be an investor today with big profits.
6 What works today might not work tomorrow
While I remain positive about the future, I always consider an outlook that does not meet my expectations. Investing strategies that work today might not work in 20 to 30 years as the world changes.
For example, the performance that we’ve seen in equities over the past 10 years might not be sustained. Inflation could remain high and interest rates could rise further than feared. New asset classes will probably emerge and so will new technologies.
So although what history teaches us about investing should not be ignored, it’s important to stay open-minded, keep learning and to hedge your bets with a diversified portfolio.