The earlier we start investing, the better. The best time to start investing is actually when we emerge from the womb. But that’s too late for anyone reading this and our 20s represent the first real opportunity that most of us have to start.
Our 20s are a time when many of us start work and receive our first salaries. It’s also a time when we start to think about building for the future and taking financial responsibility. In terms of building financial wealth, investing in the stock market may not feel like a priority, but it’s the best option for most of us.
Why invest in your 20s?
Investing early allows our investments to compound over time. Simply put, that means we earn interest on our interest. And time is an investor’s best friend. The longer we hold shares, the better they perform. Holding decades allows us to ride out any bear markets and recessions – like the one we’re in right now. Over this kind of timescale, shares invariably move up, tracking economic growth. If we start investing regularly in our 20s, then we have the potential to make huge gains by the time we’re 60. More than anything else, this really is the path towards early retirement and financial freedom.
In theory, investing in our 20s means that we can take on more risk. There’s plenty of time for our investments to recover if they falter early on. But we need to be careful how we view risk. When I say we can take on more risk, what I mean is more risk for a given return. If we want to maximise our returns, then we need to manage risk properly.
It’s not an open invitation for us to start investing in speculative miners or oil exploration companies. Instead, we need to be investing in quality companies that are able to grow sustainably over a period of many years. This is the best way to make the most of the extra time we’ve got. Otherwise we risk wasting our early start.
The way that we can take on more risk is by investing in growth companies that are maybe on the more expensive side. What seems fairly expensive today, may be a bargain in 20 or 30 years’ time. When investing with such a long timeframe, we don’t need to be quite so focused on price. Investing in our 20s therefore gives us more flexibility.
It’s also important that we still diversify by investing in a number of shares, not just one or two. I’d recommend at least 10. Along with time in the market, diversifying the number of holdings is a great way to improve long-term investment performance. If one company fails, there are others that can fill the void.
All in all, investing in your 20s isn’t completely different to investing in your 50s. We can afford to pay a little more and target the sort of growth companies that can really outperform in the long run. But we should still be focused on quality companies and on diversification. The most important thing is that we start investing early and invest regularly. This is what will create the biggest gains.
Thomas has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.