Many financial articles focus on the benefits of investing at a young age. No matter the amount, starting earlier allows your money to truly work for you, as it reaps the benefits of compounding interest.
While compounding interest is often the main argument for investing earlier, it is by no means the only benefit. Investing early allows clients to increase their knowledge of the markets and the power of diversification. As advisors, we try to decrease volatility through diversifying portfolios and rebalancing whenever a portfolio moves off target. Diversification and rebalancing will not completely factor out large downturns in the market, but it can help to cushion the blow in a down market. It is important to understand that it is healthy for the market to go through economic cycles of expansion and contraction. The average investor goes through six to eight cycles in their lifetime1, and it can be hard to remember the good days in the market when we see market contractions. The more experienced the investor, the more familiarity they have of market contractions and the more confident they can be in future investing success.
The other benefit from investing early is that it creates a habit of saving. Even if clients start small and save a minimal amount of money out of their paychecks, they still create a useful habit that will greatly benefit them in the future. Young investors can also start slowly increasing the percentage that they save or have larger increases when they receive raises. That way savings percentage will increase but the young investor will not feel the squeeze of the extra savings as retirement approaches.
Developing a savings plan at an early age helps create and reinforce important financial habits, knowledge of the markets and the importance of diversification within a portfolio. If you are considering investing for the first time or this blog has made you think of someone who may need some guidance, the advisors at Financial Plans and Strategies would be happy to assist you. Please reach out to us with any questions that you may have.
Citation:
1 - https://www.frbsf.org/education/publications/doctor-econ/2002/may/business-cycles-economy/
Below are a couple of links to articles relating to this topic:
https://www.capitalgroup.com/individual/planning/creating-financial-plan/millennial-investing.html
https://americanfundsretirement.retire.americanfunds.com/planning/benefits-of-starting-early.html
https://investor.vanguard.com/retirement/savings/when-to-start