I am not in my 20s any more, but I regularly have the opportunity to talk to many people who are starting out in adult life. One of the most important questions they have is how to ensure a financially secure retirement one day.
Paying close attention to several investing decisions could mean retiring a millionaire versus having financial worries in older age. However, if I could offer my younger self only one piece of advice, it would be: start saving early, that is, today!
Why starting investing now is crucial
Let’s say you’re 25 with £1 in savings. If you invest £3,600 per year (deposited at the end of the investing year) and earn 8% annual interest, you’ll have £932,625 at the end of 40 years.
On the other hand, if you wait to start investing until you are 30, you will have £620,355. And if you wait another five years until you reach 35, at the end of 30 years, your account balance will only be £407,829, or less than half of what you could have had by investing a decade earlier.
The difference is due to the power of compound interest. This has a snowball effect on personal savings. As time goes on, interest leads to more money, over and over again. In other words, if you start saving later in life, you’d have to save more each year to be able to make up the difference.
At The Motley Fool, my colleagues provide detailed coverage of share investing and retirement planning. They highlight that over time the broader stock market returns about 7% to 9% annually on average.
Investing in what you know and use
What else is important? Well, this may be one of the simplest investment tricks in the book. I would do due diligence on companies that are part of my daily life. When I know more about a company whose products I regularly use, I find it easier to invest my money in their shares.
People in their 20s are especially well suited to spot up-and-coming brands or stay on top of companies that will be around for many decades to come.
Take JD Sports Fashion, the retailer, for example. In 2016, its share price was hovering around 200p. At the time, if young investors had paid attention to how Millenials drove up the demand for must-have trainers and how well suited the group was to benefit from this booming market, they might have purchased JD shares.
Fast forward to July 2019 and each share is worth about 600p. In other words, the investment would have tripled.
Looking beyond our borders
London has always sat at the centre of international financial markets and attracted robust companies to list there.
However, there are also plenty of opportunities abroad, especially in the US where technology and innovation come out of Silicon Valley, as well as in high-growth areas like China and rest of Asia.
Thus investors in their 20s could consider investment trusts that own a broader selection of assets and are managed like investment companies.
One such fund to consider could be the Scottish Mortgage Investment Trust, which is heavily invested in tech shares, such as Amazon in the US and Alibaba in China. Younger investors could possibly benefit from diversifying some of their holdings into tech shares.
