When I was in my early 20s, I thought the stock market was out of reach for me. I heard news anchors announcing the Dow and Nasdaq indexes on the radio day in and day out, but never had it occurred to me that I should invest in it myself. I was a graduate student who relied upon my stipend to get by each month. How would I be able to “afford” the stock market? In other words, the stock market was only for the rich and more established people with spare cash lying around in my imagination. It was simply too much of a luxury for someone like me.
What a fool I was! If I could travel back in time, I wish I could crack my head open and put some finance sense in. It is with deep regrets that I am writing this article to inform you of the absolute need to invest in the stock market as early as possible, preferably in your 20s. It is the best thing you could do (possibly with the least amount of effort) to benefit your long-term finance health and guarantee a retirement with no concerns over financial woes.
Here are a few of the benefits of investing in the stock market at an early age.
1. Investing in the stock market grows your money
This is the simplest reason people buy stocks. If you own a stock, you own a share of the company that issued that stock. When the company does well, you are entitled to harvest its profits in the form of a dividend or an increase in its share price. It is as simple as that!
Generally, investors should expect between an 8% and 10% annual return from the stock market, considering the historical average return of the S&P 500 (otherwise known as “the market”). If properly managed, your stock portfolio’s annual return is going to be much more lucrative than a savings account, a CD (certificate of deposit), or bonds.
Okay, let me be more specific!
If you invest $10,000 in the stock market now, and it gains roughly 8% per year, you’ll end up with over $20,000 in 10 years. In just 10 years, the same amount will have doubled. If you continue your steady investment over a longer period of time (say, 30, 40, 50, 60, or more years), your investment will accrue an amount that is way bigger than you could imagine.
This is why you should start investing in the stock market early! The younger you are when you start trading stocks, the better the market’s compounding effect works in your favor.
For example, you decide to put down $10,000 for initial investment and allocate $10,000 for investment in stocks every year until you are 55. If you are 25 now, your money will grow for 30 years, which will allow you to accumulate more than a million dollars.
But if you put off your investment and wait until you are 40, your money would have only stayed in the market for 15 years by the time you are 55, giving you a mere $300,000.
In short, the earlier you start investing steadily and wisely, the earlier you will be able to gain enough wealth for a decent retirement.
2. Investing in the stock market grows your investment experience
Another seldom discussed benefit of investing early in your life is you can afford to make a few terrible mistakes. Even if the stock market in the U.S. has generally gone up over the past 90 years, it can be volatile at times with nasty crashes (hearkening back to the recent crash due to the coronavirus pandemic) or a prolonged bear market. But you can withstand unpredictability and losses when you are young because you have plenty of time to make more money in the future. Unlike investors in their 60s who may consider retiring in a few years, you are less susceptible to emotional trading or any concerns over losing your retirement money when you are in your 20s.
When you start investing in your 20s, you also have plenty of time to learn different strategies for trading stocks and find the one(s) that works for you. There are so many strategies you can use to increase the value of your stock portfolio. You may adopt the common “buy low, sell high” strategy. You may invest in ETFs linked to the market. You may be interested in day trading or trading long-term. None of these strategies is bad as long as it works for you. What matters is, you have to put in the time and effort to understand how different strategies work. You will also learn from not-so-successful trading experiences and become a disciplined investor whose decisions are not easily swayed by the day-to-day fluctuations.
When I first entered the stock market, I went through some rough patches. I had to endure big losses as a result of both my panic selling and a bear market at the whim of an imminent trade war. But I got to try out a variety of strategies, tools, and software, and I have found strategies that work for my style of trading. I am getting better at trading stocks, and my investment portfolio has become one the most important sources of income for me.
You can do the same, or even better. Don’t wait until you are past your 20s. You build up your practical experience as you trade. It is as easy as that!
3. Investing in the stock market helps you learn how to budget
The last reason that you should start investing in your 20s is that it will motivate you to spend your money wisely. Once you start investing, you will become more conscious of your money, and you will be more inclined to keep track of not only how much you spend but also where you spend. This way, you start to budget, and your expenditures become more selective and purposeful.
My personal experience would attest to this. Ever since I started investing in the stock market, I have felt driven to manage my finance well through budgeting. I have kept and followed a monthly budget and become less profligate with my money. I was also determined to dedicate a small percentage of my monthly income to setting up a recurring investment every three month. You can read about learning how to budget with Excel here.
Barring essential expenses such as household necessities, I have set a limit on other categories, including restaurants, clothing, entertainment, and subscriptions. I dutifully input my expenses in a spreadsheet to keep track of my spending. When certain non-essential categories are reaching their limits before the month ends, I stop making purchases in those categories and wait until the next month.
Before the Covid-19 pandemic, like many young professionals, I used to pick up a coffee at Starbucks before going to work, or grab a sandwich in the convenience store in lieu of bringing my own lunch. Ever since I started to work from home, I have found it easier to cut back those expenses. Does this ring a bell? Indeed, regardless of the pandemic, all those expenses are non-essential. Why not save up the money and invest it in the stock market? You will profit from trading stocks if you do your homework right!
I also started to be more careful with where I spend my money. I feel more willing to support a company’s business by shopping there because I own part of that company in the form of stock shares. I also became more observant of the company’s promotional campaigns as a way to gauge its business development plans.
In other words, you will gain a different perspective on money once you start investing in the stock market. You will start to be more responsible for your own financial health.
To sum up
It’s truly quite beneficial to start investing in your 20s, as I have found out first-hand. It may seem daunting at first, but there are many brokerage platforms that have made it much easier for investment novices to get started. For example, I got my start using Robinhood, a popular online brokerage service with no commission fees or account minimums. Hopefully you will find the experience as rewarding as I did. Happy investing!