Investing is seen by many as an arduous task – one that is complicated, risky and best left to other people.
It is often easier to avoid investing altogether, than confront it head on.
A natural human reaction is to create excuses that rationalize why one has chosen to avoid an activity.
Investing at a young age is no exception: a variety of misconceptions about investing young perpetuates the idea that investing is best left to older people and experts. This article will examine several of these misconceptions that are often used as an excuse to delay or avoid investment activity.
“I don’t have enough money.”
While it is true that young adults are usually inundated with debt – from student loans, car payments and mortgages – many can find at least a small amount of money to invest on a monthly or yearly basis. Contributing to employer-sponsored plans, such as 401(k)s, can allow a small investment to grow over time, particularly when matched by the employer. The power of compounding creates a golden opportunity for young investors, even those on a tight budget. It is important to keep in mind that investing does not have to involve huge positions; it is possible to invest in a very small number of stock shares.
“I don’t know anything about investing.”
Ignorance is not an excuse to avoid investing. Young investors have many years to study, research and develop proficiency in investing techniques and strategies. A wealth of information is available to tech-savvy young adults, from financial and education websites, to social media pages, webinars and the many advanced trading platforms that are available for free or for a limited monthly fee.
“Investing is too risky.”
Many young adults are keenly aware of the economic crisis and the resulting chaos that ensued. While investing can be risky, it can be managed in a way that keeps it from being too risky, however that is defined for each individual. Young investors with a low risk tolerance can select more conservative portfolios, like blue-chip stocks and bonds. Investors with a higher tolerance for risk can enter more aggressive positions with higher reward potential.
“Investing can wait till I’m older.”
Young investors have to contribute less to make more money over time than older investors. This is due to the power of compounding. A person who starts at age 20 and invests $100 per month until age 65 (a total contribution of $54,000) will have more than $200,000 when he or she reaches age 65, assuming a 5% return. If the person delays investing until age 40, he or she will have to contribute $334 each month (a total contribution of $100,200) to arrive at the same $200,000 by age 65.
“Investing is for old people and Wall Street types.”
While the media do portray many investors either as wizened old men or young, power-hungry Wall Street types, most investors are ordinary people, both young and old, wealthy and not. Even though we often hear “You are never too old to start investing (or saving for retirement),” the opposite is true as well: people are never too young to start investing.
“My 401(k) should be all I need.”
Depending on social security and 401(k)s can be risky. It is difficult to predict where social security will be in future years, and many investors learned the hard way in the last decade that employee-sponsored retirement plans don’t always work out. Starting young and diversifying through a variety of investment vehicles is the best way to secure one’s financial future.
The Bottom Line
Young adults often have so many distractions that it is difficult to set aside the time to think about investing. In addition to being busy with friends, work and hobbies, this age group is often burdened by a significant amount of debt, making investing seem like something that will have to wait. Despite these common misconceptions about investing young, those who do start studying, researching and investing young, have many advantages over those who wait, including the power of compounding and the ability to weather a certain degree of risk. (For a slightly subversive take on financial misconceptions, check out 5 Investing Statements That Make You Sound Stupid.)
The Pros And Cons Of Target Date Funds For Young Investors >
This story was originally published by Investopedia.