They reckon youth is wasted on the young (that all depends on your definition of waste). But there is no guarantee that you grow wiser as you get older, either.
When it comes to investing, it doesn’t matter how old you are, it’s never too late to start, although you don’t need to be a mathematician to figure out that the earlier you start, the better off you will be.
Exactly why that is so, gets down to our previous chat about compound interest. Even a fairly modest start when young can build into a decent sized portfolio over the years, particularly if the earnings on savings and investments are left untouched.
That way the earnings begin to compound and create their own momentum and you start earning interest, not just on your original investment, but on the interest you’ve already earned. The longer you leave it, the more the earnings accelerate.
So clearly, time is of the essence. The earlier you start, the greater the build-up of momentum.
Starting early has other advantages too. While wages for young and inexperienced workers tend to be much lower, they often have a much larger proportion of their earnings available for discretionary spending, usually because their parents put a roof over their heads. Socking away a small proportion isn’t too difficult. It just requires discipline.
Volatility in the markets tends to have less impact on the young as well. That’s because they have a smaller amount invested and because they have a much longer time frame from which to recover from serious market downturns.
The opposite forces work as you get older. Once you retire, you need to start lifting the income or the yield from your investments just to get by. In most cases, retirees need to spend at least some of the principal just to exist.
And serious market downturns can have a debilitating effect on your savings when you are older. You have a bigger investment, so your losses are greater. Often there is no outside income, which accelerates the drawdown of savings. And clearly, the older you are, the less time you have to recover from a serious downturn.
The most crucial time to be hit by volatility is in the five years before you retire and the five years after. At that point you should be concentrating on capital preservation. The youth can afford to be a little more reckless, to take on more risk. That’s what being young is all about.