Welcome to the Young Investors section of our website.
If we had a dollar for every time one of our clients said: “I wish I knew what I know now when I was 20” then, well, we would probably invest it.
As financial planners and young investors, we enjoy the opportunity to share this story with young investors. As many financial professionals assert, it’s simple, but not easy, to become a millionaire. For a 20 year old, there is no better way to describe it. All it takes is time (the “simple” part) and a little discipline (the “not easy” part) - capital markets take care of the rest.
To help visualize, we created "The Story of Ben and Jerry” linked below (sorry, it has nothing to do with ice cream). The chart chronicles the investments of two young people to demonstrate the power of compound interest. Ben makes investing a priority in his early twenties, while Jerry delays until his thirties. For illustration purposes, Ben stops investing at age 32 and Jerry continues until age 65. Despite the fact that Jerry invests three times as much, Ben's portfolio value far exceeds Jerry's. If Ben had continued investing $2000 until age 65, as indicated by the footnote, he would have accumulated $1,435,810. Nearly 3 times what Jerry accumulated – all because of the first 10 years!
The moral: One dollar invested today is equivalent to three dollars invested in the future. Each year you delay investing, the future savings required increases.
Unfortunately, this principle is not common knowledge, nor is it generally taught in schools. It requires discipline and a little bit of sacrifice, but anyone can do it. It’s simple, but not easy.
We’ve found the following guidelines helpful for young investors:
Step 1: Determine the amount you can invest.
Can you afford to invest $200 per month? How about $2000 per month? Maybe it's only $50 per month. The answer is different for each of us. Values, personality, career choice and other factors will dictate the initial amount and it will change over time. Regardless of circumstances, however, everyone can determine an amount by choosing the right balance (between today's goals and tomorrow's goals) for them. Whatever the amount - get started!
Step 2: “Pay yourself first.”
Once started, make investing a financial priority. Experience suggests that people are far more likely to succeed by automating their investments. Make investment automatic the first of each month rather than waiting to see what is left. When you are tempted to stop investing, don’t! When you get a raise or drop an expense, revisit the "chosen" balance but make sure a portion of the improved cash flow is invested.
Step 3: Diversify and keep an eye on the long-term horizon.
Invest in a well-diversified portfolio of stock mutual funds. Keep adding to it on a monthly basis and leave it alone. Remember that your portfolio will experience ups and downs and trust that capital markets will take care of the rest.
Of course, this explanation is oversimplified. If it really were as easy as three basic steps, everyone would do it. But the concept is simple (determine an amount, “pay yourself first”, and diversify). It will be difficult to stay the course - but the earlier you develop the habit the better.
Why is it so important? From time to time, we find ourselves in difficult discussions with 50-year-old clients about sacrificing today to catch up on retirement tomorrow. We also find ourselves in discussions with a 40-year-old couple trying to put kids through college and save for retirement simultaneously. In either case, there is no easy answer. The real solution lies with Ben and Jerry - a modest sacrifice and a little discipline in your 20’s prevents major sacrifices in your 50’s. This is why we want you to "know now, what you will know when you are 50"!
Dustin J. Smith, CFP® Michelle Carter, CFP®
Visit Dustin On Visit Michelle On
Jeff Karst, CFP® Evon Mendrin, CFP®
Visit Jeff On Visit Evon On
But wait - there is more to the story. If you find yourself struggling with the "balance" question in Step 1, you may find the Tom and Jerry Story helpful too.