Invest in the stockmarket early in life, experts tells young investors
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Investing in stocks is riskier than piling on cash, but it’s a risk worth taking — especially for young people, says investment expert Katie Nixon.
Ms Nixon is the chief investment officer at Northern Trust Wealth Management, a US wealth manager with offices in Sydney and Melbourne.
Northern has $US287 billion under management and represents 20 per cent of the Forbes 400 wealthiest Americans, private businesses and individuals.
“We work with a lot of multi-generational families, and when we’re talking to some of our younger clients, who are 19 and 20 years old, we give them this advice: Don’t be afraid to invest,” Ms Nixon says.
“Markets don’t go up every year, but, over time, they do go up.
“Form a habit and keep investing over time, and recognise that people who are young right now potentially could live well past 100 years old.”
Warren Buffett, the most famous investor of this era, recommends keeping things simple, especially for people who aren’t sure where to start.
“My regular recommendation has been a low-cost S&P 500 index fund,” Mr Buffett, the chairman of Berkshire Hathaway, said in his 2016 letter to shareholders.
Such an exchange-traded fund (ETF) would move in lockstep with the S&P 500, and spread the risk of betting on a handful of companies.
The power of compound interest
Understanding the power of compound interest — and putting it to use — is the next best advice Ms Nixon has for young investors.
Leaving a savings account to grow over time ensures interest is earned not just on the balance, but on interest that’s already been earned.
Recognising how powerful this concept is in the long run is the best advise for a young person figuring out their finances, according to Ms Nixon.
“It’s the most powerful answer I can give — that is, save as much as you can as early as you can,” Ms Nixons said when asked her advice to someone starting a career.
“Start saving and enjoy the benefits of the eighth wonder of the world, which is compound interest.”
The chart below shows the power of compound interest through three hypothetical people who started saving at various stages of their careers.
It assumes that each person except the third (more on that in a second) put aside $100 monthly in an account with a 3 per cent interest rate.
Clearly, the person who started earliest, at age 25, had the most cash by the time they were 65.
It also shows that it is costly – now and at retirement – to start late and play catch up; the person who started at 40 and saved twice as much fell behind the person who started earliest.