The question I always seem to ask myself is why young people are not investing any money. If you ask any of your friends in their 20’s about how much they have invested, you are bound to get responses like “what?” or “ I don’t earn enough to invest!”. A lot of people will follow this up by saying something like “I don”t have a clue on how to pick stocks” and that’s the irony because successful investing is not about picking stocks; especially at a young age. Although it is true that some twenty somethings may now be participating in their pensions (with the new work place pension scheme), that is probably the extent of their investment. And yet, the 20’s should be the most important investing years of our lives.
Problems faced by young investors.
Investors in their 20s face two major problems when they think of investing:
- They are scared and think investing is risky
- They have the impression that they need tons of money to invest
Problem: Scared of investing
One of the biggest reasons young people don’t invest is because they are scared. This is especially true in this day and age where information is freely available online. You get too many doom mongers and media outlets stating we are on the brink of the next “Global Financial Crisis!”. This deters young people from taking that first step into the investing world. And yet, what people fail to understand is that a drop in the stock markets is a good thing for people with long investment time frames like young Peoples. It means that stocks are essentially on sale and you can buy more stocks for less and make let your money grow for decades. Besides, long term investors should not pay attention to what most people call news, because this news is normally Noise!
Solution: Use Pound Cost Averaging
The solution to having this fear that another financial crises coming round the corner is to invest using pound-cost averaging. Pound cost averaging is putting a set amount of money into stocks at a determined frequency, say £100 per month. This type of strategy is good during all market conditions. In down markets you’re able to buy more shares and in up markets you’re adding fewer shares to ones already producing capital gains. The benefit of pound cost averaging is that it takes the pain out of deciding how much you can afford each time you put money into the market.
Pound cost averaging compensates for the highs and lows of the stock market. Furthermore, with dividend re-investment and compounding returns, you are always set to gain in the stock market over the long-term even if the stock market crashes along the way. Historically the market has crashed about once very 8 years. Do you see people pulling out of the stock market completely? No, this is because they are investing for the long term and they know that there returns will be higher due to divided re-investment and compounding returns.
Problem: Thinking they don’t earn enough to invest
Another problem young people have is that they think they do not earn nearly enough to take part in the stock market. They have this ideology that only the rich invest in the stock market. Furthermore, they believe that they do not have the required finances to hire a wealth advisor or portfolio manager.
Solution: Technology has made investing cheaper and more accessible.
With the rapid advance of technological development, taking part in the investment world is cheaper than ever. You can essentially buy shares for £9.95 at reputable online firm search as Hagreaves Lansdown and AJ Bell Youinvest. You can even by shares for as cheap as £1.95 a trade with DeGiro. But an an even and better way to invest is using funds. You can start investing in funds with as little as £100 a month and they only charge you a small fee of about 1% on the total capital in the fund. Many young people will say that £100 does seem a lot but what if told you that investing £100 now is like paying your future self £800-£1000. Yes, that’s right and that is due to the power of compounding.
If you invest £100 a month, an receive the average stock return yield of 8% per annum, after 10 years , you’ll have £18, 128. Now tell me, is investing still not worth it?
If you are not comfortable picking stocks or funds for yourslef, why not try an online portfolio manager like Nutmeg. These ‘robo-advisors’ buys take care of your whole portfolio for you by buying the right mix of bonds, stocks and other assets (advantages and disadvantages of different asset classes) according to your risk preference. And if you do want to pick your own stocks, free websites like Stockflare provide all the data in an easy to understand manner that will allow you to pick the stocks that are right for you.
Why you should invest in the stock market
People always search for a sure-fire way of getting rich and the stock return always delivers. Although you will not get rich quickly you are sure to have substantially grown your wealth in the long term. By opening an investment account, you give yourself access to the biggest moneymaking vehicle in the history of the world – the stock market!