Although the current generations are investors investing much less when compared to that of Baby Boomers or the Greatest Generation that came before them, the advent of fee-free trading platforms has caused investing to grow in popularity with young adults (and even some teens) today.
I know it has become some sort of pop-culture reference — a meme, if you will — to say that millennials are more broke than generations before them, but that stat is sadly 100% accurate. This lack of assets, wealth, and net worth makes the younger crowd scared to take risks with their investments. However, believe it or not, it is not only okay, but it is recommended that younger investors take risks early on.
Young Investors: Learn From Your Investing Mistakes
The best way to learn from something is to make a mistake. Younger investors are likely fairly new to the world of investing. And, whenever you are learning something new, it is common to take some missteps. Now, when dealing with money, those missteps can be pretty bad.
Now, if you are young and make those mistakes, you have got time to recoup your losses. Younger inventors have the flexibility and time needed to take on the risk and recover from any losses that may have resulted in the process. The result is you either get a decent reward for taking a risk, OR you learn from your mistakes and have time to recoup.
Scenario 1:
You are 58 years old, a few years away from retirement, and you decide to use some of your retirement portfolio to make some risky investments. You lose out big, and there is no way you can recoup your losses before your retirement age of 62. This is also a great reason why you need to reassess your risk tolerance every 5-10 years.
Scenario 2:
You are 21 years old and decide to test the waters with some risky investments. You lose out big, but you learn a valuable lesson along the way about whatever securities you were investing in, and you have got plenty of time to recoup your losses.
Crisis-Affected Markets Are Great For Younger Investors
It is almost impossible for young investors to be too aggressive with their investments. As we mentioned above, they will have plenty of time to recoup their losses and should the risky investments pay off, and they will have a considerable head start with their portfolio that will surely pay off, in the long run, thanks to compound interest.
The dot-com bubble, 2008 financial crisis, and now the market downturns from the Covid-19 pandemic — all of these were and are fantastic opportunities for young investors.
Over time, the stock market has averaged 10% returns over the last century. Some years are bad, and sometimes there is a string of years that are bad, but over time it has always realized gains. Whenever we have bad years, the market must make tremendous leaps to get back on the plus-side of things.
We have had some terrible market days thanks to the Covid-19 pandemic, and many economies are suffering as a result. However, the laws of economics tell us that there are going to be some incredible leaps in the coming months or years that will make up for these tremendous losses.
Young investors that put 80%-100% of their portfolio into the stock market stand to make unbelievable gains as they ride the elevator back to the top during the market upswings. Now, it may take a few years, which is why this would not be a good idea for older investors.
The young bucks out there have time to ride out the wave and make up for any losses along the way. If you are a young investor, use this time wisely to make some risky moves in hopes of either a big payoff or the life-long lesson of learning from your mistakes.