Top 5 Benefits of Investing While Young

Jake - Author/Founder

Jake - Author/Founder

I'm Jake. I believe you can build a wealthy life through frugal living and index investing.

Young investors have two primary benefits relative to their elders: time and room for error. 

The young investor can take advantage of compounding and reap higher returns. Most importantly, they can grow from mistakes and improve their investing skills without torpedoing a high-value portfolio. 

Not only are young investors able to grow more wealth, but they will develop the competence that is necessary to later preserve that wealth.

In this post, I focus on the five key benefits of investing while young.

For those who feel like they are late to the investing game. There are many complexities and obstacles in life that make investing at a young age difficult. It’s better late than never to start investing.  

Table of Contents

1. More Time For Compound Growth

Time is your best friend when it comes to investing.

Your brain (and my brain) think in linear terms, but investment growth is non-linear. It’s exponential in nature. Therefore, the compound effect is non-intuitive. 

Your money makes money. That earned money then earns more money. This is the compound effect. Exponential growth.

Portfolio growth starts off slow, but then boom. The snowball effect takes hold. 

This plot shows the importance of time by comparing two investors who each invest $1,000 per month at an 8% return. One starts investing at age 20. The other starts at age 35. 

See the difference? Time matters. With time, you can grow a massive amount of wealth, without a massive income. 

Plot of Compound Growth Depending on Starting Age
Starting AgeFinal Value @ Age 60Amount Contributed Total Investment Investment Value
20$3,638,922$480,000$3,158,922
35$1,036,209$300,000$736,209

Time Invested > Amount Invested

My plot shows returns as smooth. In reality, stock returns are choppy from year to year. Some years you’ll see +30%, others -20%. To get a better idea of reality, you can check out this post on 30 Years of Stock Market Returns: Top Pains and Gains. 

With time, invested money will work harder than you. Depending on your savings rate and investment returns, annual investment returns will eventually exceed your annual income. 

2. More Risk Tolerance: Higher Future Returns

Time doesn’t only help you reap the power of compounding. It also helps you reap higher returns because you can take on more investment risk. 

A long time horizon and a high investment returns are a deadly combo.

With a higher risk tolerance, you can invest in riskier assets such as stocks instead of bonds. With more risk comes higher expected long-term returns. To learn more about investment risk, you can read Investment Risk and Risk Tolerance: An Introduction. 

There are two key factors that increase a young investor’s ability to take on risk: 

  • A long time horizon. 

A long time horizon helps you stay invested through the painful downs of the market, as you don’t need to sell your investments. Someone in their 20s may have 30+ years available before they need to rely on the investments for retirement. 

Future earnings power means a young investor is less reliant on their investment portfolio. They can rely on their future earnings power (income) to cover future expenses. Any losses, even if permanent, are small relative to total future earnings in the years ahead.

High Risk Tolerance: Investment Returns

Wonder what to expect for investment returns?

Over the past 120 years, annual stock market returns have averaged 10% for the US market and ~8% for the global market (Credit Suisse Investment Returns Yearbook).

These long-run returns are accessible through index mutual funds and ETFs, as I discuss in this post on Index Funds: A Simple Way to Invest. I personally hold 1000’s of stocks around the globe using low cost total market index ETFs. 

3. High Tolerance for Error: Lower Tuition Costs

Young investors often have a tiny portfolio relative to their future earnings power. A 50% loss in a $1,000 portfolio is only $500. That’s only a few weeks of  work.

A 40-year-old with a $200k portfolio is a bit different, as there is less room for error. A 50% loss may equate to 10 years of savings down the line. No fun.

Young investors have room to make essential errors that grow investing skills.

Errors are necessary, becuase you can’t become a good investor from reading alone. Instead, you must take action and do. This is the only way you can learn from the pain of failure. I talk a bit more about failure in Self-Discipline: The Key to Building Wealth. 

Here are some common investing mistakes:

  • Buying speculative stocks or crypto that rapidly dive to zero (Behavioral).
  • Over-estimating risk tolerance and panic selling during market downturns (Behavioral).
  • Buying an individual company that gets clobbered by competition and the stock falls 90% (Technical). 
  • Buying options contracts with limited understanding and losing 100% of your money (Technical). 

Although losses hurt young investors, the total loss will be minor relative to lifetime income. These losses are best viewed as tuition that improve competence for the future when your portfolio is larger.

4. Technical Abilities Grow with Portfolio Size

To start investing, you don’t need to be perfect. If this was the case, all investors would be stuck in a state of analysis paralysis. No one would be investing. 

I started investing by learning about the technical basics of stocks, and opened a practice investing account when I was 18. Eventually I had to get skin in the game with real money. 

I opened an individual trading account in a TFSA and started buying individual stocks at age 23. I had to learn about the technicalities of the TFSA, and the basics of trading. Once the TFSA was maxed, it forced me to learn about the RRSP and taxable accounts. Naturally, this flowed into learning about taxes on investment income and asset location.

During this time, I made technical errors. I did not understand exchange fees when buying US stock, I paid commissions on multiple small trades,  I was under-diversified, and I fell into yield traps. You can learn more about my beginner investing mistakes in this article. 

Young investors have sponge-like brains, time to learn, and more room for error. They can learn about investing incrementally, making it learning fun and less overwhelming.

Finally, young investors can continuously learn, which permits investing knowledge to grow with your portfolio size. 

5. Time To Develop Strong Investor Behavior

When it comes to investing success, behavioral control is superior to technical knowledge. Full stop.

DIY investing from a young age trains mental and emotional resilience. When the 50% stock market crash hits, this resilience will be necessary to limit behavioral investing errors. 

Common emotion-driven errors include panic selling, impatience, or buying speculative assets due to fear of missing out (FOMO). Such behaviors erode returns by incentivizing you to “buy high” and “sell low”. On an interesting note, panic selling and FOMO are both rooted in Loss Aversion. 

Young investors can increase emotional fortitude in proportion to portfolio size. Investing early sets the foundation for long-term investing success. Later in life, when a portfolio is large, behavioral biases will be under control. 

Conclusion

Benefits of investing while young include higher returns, more time for compounding, and superior long-term investing competence.

The biggest limitation for young investors is behavioral mistakes, primarily impatience, speculating, and panic selling. It’s hard to detect these biases as confidence peaks for young humans, especially young men. This was certainly the case for me. It took a while before I was humbled.  

Before jumping in to invest, I recommend you read 9 Signs, you Are Ready to Invest. In addition, there is a balance between learning and doing. Eventually, to get better, you must take action.  

By putting some money at risk and making some errors, you learn by doing. This type of learning sticks and will reap rewards in the future when the stakes are higher.

Jake out.