There are many benefits young people have when investing in the share market. I mean, Warren Buffett made his first investment at age 11!
No doubt the first kind of investing to do when you're just starting out in life is into your savings account.
If you're young and you've managed to accumulate some savings that you're interested in using to invest in the ASX, here are two advantages you have over the rest of the pack.
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What investment strategies advantage young people?
You can invest in practically anything, from property to antiques, but let's assume you're looking to invest in ASX shares. You've got three main choices: plain shares, mutual or exchange-traded funds (ETFs) or dividend-paying shares.
If you need more information about what these are or how to trade on the ASX, The Motley Fool has a great guide on getting started.
Like all investors, young people need to take a personal approach to investing and consider their individual situation before taking action.
Depending on your stock market knowledge and your risk tolerance, there are two major investment strategies where young people might have an advantage.
The easiest, least risky investment approach for young people: invest passively
If you're looking for a hands-off approach, you could consider popping your little nest egg in ETFs or even some quality blue-chip shares, and let the interest start compounding. Because you're getting in early, you've got the benefit of time. With only a small amount of attention, your egg may grow exponentially over the years.
The math is pretty convincing on this one, and the Australian Government has developed a handy little calculator to help figure it out.
Let's assume you have $125 a week that you can spare to invest: that's roughly $500 a month. If you invest wisely and manage to grow that by 10% per year and continue to add $500 a month, you'll end up with a healthy $347,014 portfolio in 20 years. Not bad, considering you'll only be out of pocket $120,000 over the entire 20 years.
The other investing approach with advantages for young people is possibly the riskiest way to invest
You may not have as much cash in your pocket, but you've got more time to replace it if needed. Investing in smaller up-and-coming companies or growth shares that you understand and believe in can be risky, but it can also be rewarding if you get it right.
If you're going to go big, make sure you don't do so in any single company. The broader your investments are – across different industries and commodities – the less likely you are to lose everything you've invested.
What the experts say
UniSA's Financial Planning Lecturer Geoff Pacecca told On The Record what he believes all young people looking to invest in the share market need to know.
I think [they] need to ensure they have a long-term investment time frame, a well-diversified portfolio and, where possible, that they access professional advice
You should not invest any cash you think you may need for a holiday or car or anything else over the next 7–10 years. You do not want to find yourself on the wrong end of a market cycle should you need the cash in a down market.
I would say to students that your biggest asset is you. They should focus on good grades and doing well in their field of education, getting some work experience in Australia or even overseas, and be open to getting involved by volunteering and contributing in some way to their local community.
The hard lessons you don't want to learn from experience
You didn't live off ramen noodles for years to lose all your savings because some CEO made a poor decision!
Firstly, investing is a risky business. Even the most stable company can see share price volatility from a number of factors.
That's not to discount the value of properly planned long-term investments in ASX listed companies. Particularly today, as low-interest rates and rising bond prices mean that cash savings accounts and bonds aren't as prosperous as your parents may believe.
Secondly, if you have high-interest debt, you probably want to pay that off before investing in the share market. Investing in Afterpay Ltd (ASX: APT) or Zip Co Ltd (ASX: Z1P) should come after paying off all you owe them!
Finally, make sure you have a good safety blanket of a few months' expenses left over after putting your savings into any investment. You want to ensure you can still take a holiday or support yourself if your income stream slows to a trickle.
