Many young people hold off on beginning their investment journey because of low income, financial instability and a basic lack of understanding of what the stock exchange can do for them.
In this article:
- Taking your first steps toward investment
- Dipping your toes into the market
- Getting your foot in the door
- Dawn of the retail investor
Arguably, the most impactful variable for how well your portfolio will perform over time is how long you allow your money to play in the market. To illustrate, an example from Investopedia compares two college students.
The first begins early, investing $250 a month for 10 years before cutting off the tap for the next 30. The second waits 10 years, then contributes $250 a month for the next 30 years.
College student number one invested just $30,000 but will walk away with a portfolio worth $509,605, while college student number two invested three times as much — $90,000 — for a portfolio of just $375,074.
Convinced? Don’t start pouring money into the S&P/ASX200 just yet — there are a few things to think about before you begin investing.
Taking your first steps toward investment
There are a few things to knock off the list before you start buying up shares.
First and foremost is securing your immediate financial stability. If you don’t have a three-to-six-month emergency fund, now’s a good time to start building it.
Next, it’s a great idea to pay off any high-interest debts like credit cards or car loans. The Australian Securities Exchange averages about 9.3% growth per year, so if your debt repayments have higher interest rates, you’d likely only be bleeding money if you buy equities now.
Third, secure your superannuation. A much-overlooked investment vehicle, your superannuation is going to pour an extra 10% (on top) of your income into the market every year, so it’s good sense to make sure it’s working as hard as possible for you.
Ensure your super is in a single account (if possible) to reduce fees and use the Australian Government’s super comparison tool to find a solid fund that will do the work of investing for you, often at a steeply discounted tax rate compared to normal investments.
Keep in mind that unless you pay into your super after tax, you won’t be able to access this money until you retire.
While it’s a reliable way to produce a nest egg for your golden years, investing in your superannuation will take that money out of your hands for the next four decades or so.
Dipping your toes into the market
You’ve secured your immediate financial stability, and you’re ready to start expanding your portfolio.
Proactive spoke to eToro market analyst Joshua Gilbert for some tips on what to look for as a young, time-poor investor.
Gilbert's first recommendation for a young investor is to seek individualised financial advice.
“Once you’ve made the decision to start investing in stocks, it’s crucial that you have a handle on your own personal finances.
“There are stocks available for those on any budget (such as fractional stocks), but knowing your fiscal limitations is critical.
"It’s important to remember that investing in stocks is a long-term financial decision, not glorified gambling.”
From there, the eToro analyst recommends learning the market lingo, investing in what you know, and starting small.
“Start with small investments but ensure to invest regularly. It’s a common misconception that you need a lot of money to make investing worthwhile.
"On eToro, you can open a stocks position with as little as US$10.”
From there, Joshua says it's about diversifying your portfolio to protect it from sector shocks and digging in to play the long game.
“Adopt a longevity mindset when it comes to investing.
"If you’re chopping and changing your investments frequently, you could miss out on profits because these companies might not have had the chance to reach new resistance levels.
"You’ve also got a better chance of riding out any market volatility.”
Getting your foot in the door
So, any recommendations for the busy young investor?
“Big Tech seems to be the new defensive stocks when it comes to 'set and forget' reliability,” Gilbert explained.
“They still have excellent growth prospects, fortress balance sheets and substantial profit margins. It seems names such as Apple and Microsoft can do no wrong.
“Particularly when you look at Apple, even global supply chains and chip shortages haven’t slowed down their growth.
"When we look at, say, Microsoft, its drawdown from highs has been no more than 25 per cent, which shows the defensive nature of these Big Tech stocks.”
Dawn of the retail investor
When it comes down to it, actually putting your money into the market is the most important step in investing.
“2020 will go down in history as the year that not only gave way to a global pandemic but also to the rise of the retail investor,” Gilbert concluded.
“We are seeing record interest and participation by retail investors who make up nearly 25 per cent of stock market activity on peak days.
"This trend is here to stay, we believe, and will continue to grow into the future.”
Once you’ve locked down your finances, taken care of your super and gotten familiar with the market, it’s time to ride the wave.
If you’re taking the long view, (as most will advise) invest carefully, don’t get spooked through the down years, and you’ll (statistically) be sitting pretty in 40 years.
Look out for our upcoming feature, 'Most common mistakes first-time investors make – and how to avoid them'.