Volatile markets sending financial pundits into panic mode, banks telling clients to sell everything, the FTSE covered in red ink day after day. It may seem counterintuitive, but for investors, and especially millennials like myself, this scenario is an amazing opportunity to begin putting cash into the stock market.
Millennials today have one advantage that can’t be replicated by even the smartest hedge fund manager or algorithmic trading model: the power of time and compounding interest. Albert Einstein rightly described compounding interest as “the eighth wonder of the world”. Buying shares now and giving them 40 years to grow in value is the surest way to ensure a healthy nest egg when the time comes to retire.
And the time to begin socking away savings is now. Don’t put off investing by saying you’ll get around to it when you’re earning more later in your career. Thanks to the miracle of compounding, at age 65 each pound you put away at age 20 would have historically doubled in value compared to a pound saved at age 30. The Motley Fool’s own Morgan Housel explains the numbers behind this in a great article.
But how to begin? The FTSE 100 is down 15% over the past year, unfairly dragging down with it shares of otherwise great companies. All investors, but particularly those of us with years ahead of us before retirement, would be well served by beginning to sift through the wreckage for bargain purchases. However, if you’re just starting out and don’t want to dive right in to buying individual shares there’s an excellent alternative. Buying a low-cost FTSE tracking index fund allows you to own the entire the market while you learn more about shares and investing.
If you’re ready to look for bargains, great blue chips such as Royal Dutch Shell, GlaxoSmithKline, and HSBC can be bought at valuations cheaper than the FTSE 100 at large. With diversified revenue streams, global reach and 5%-plus yields, these could form the backbone of a great portfolio to hold for decades. Although they’re not the most exotic of shares, reliability and simple business plans are exactly what legendary investors such as Warren Buffett and Peter Lynch look for in their investments.
The benefit of not needing to draw on our investments for several decades means that not only do our portfolios have time to recover from dramatic drawdowns, but that we should view times like these as a great opportunity to buy more shares at low prices. Whether it’s individual shares or index funds, the most important action to take now is to start saving whatever you can and letting your money work for you, rather than the other way round.
Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline and HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.