What is the real benefit of investing at a young age?

I often write answers on Quora, where I am the most viewed writer for investing and personal finance, with over 220 million views.

On this article, I will use my answers from Quora to answer the following questions:

  • What is the real benefit of investing at a young age?
  • How does compounding work in the real world?
  • Why should you invest at a young age?

If you want me to answer any questions on Quora or YouTube, or you are looking to invest, don’t hesitate to contact me, email (advice@adamfayed.com) or use the WhatsApp function below.

What is the real benefit of investing young?

We are always told there is no such thing as a free lunch by people throughout life:

That usually true but in investing there is one big exception; if you leverage time. There are two reasons for this.

Firstly, compounding. Imagine you have two 18 year olds. They both have part time jobs. So they can both afford to invest $4, $5 or $6 a day. It’s a coffee a day.

Steve invests $5 a day from 18 until 26 and then does $16 a day from 26 until 56. Stuart, in comparison, doesn’t invest until 35, but is aggressive once he does. He invests $1,300 a month from 35 until 56.

So Steve has invested $14,400 for 8 years until 26 and then $172,800 until 56. So in total he has invested $172,800. Stuart has invested $327,000. So more than double what Steve has invested.

Now let’s say they both get the same returns. For arguments sake let’s say they get 8%, which is 1%-2% below what the historically market performance for the US Markets has been (more on that below).

The results are Steve has $912,783 and Stuart has $849,525. So Steve has more, for investing less and indeed moderately.

He can afford to do more things, including the pursuits of hobbies, and still have more than Stuart.

Second, risk related to return. The idea that “the higher the return means the risk is higher” is true if you are investing for 2, 5 or maybe even 10 years.

If you are investing for decades, it isn’t true to say that higher returning assets like the US Stock Market are riskier than low volatility assets like bonds.

Stock markets in the US and UK (FTSE all Stars) and many other markets have never been down over a 30, 40 or 50 year period:

So you can invest with less risk, and get higher returns, by leveraging time. If you invest at 18, 20 or 25 and markets are down for 10 years, that is an opportunity. It isn’t as much of an opportunity at 65.

So the best time to invest was yesterday as we will never be younger than we are now.

How should a young person invest money?

In the following basic steps:

  1. Firstly need the academic evidence, and ignore any other influences including CNBC, Bloomberg and the financial media
  2. From that point on, the answer to your question will become obvious.
  3. Assuming you are below 40, you can hold 90% in equity markets. If you are from the US, that might be 90% in the S&P, or 80% with 10% in International EFTs, with 10% in government bonds. As you age, increase your bond allocation to 25%+, especially in your 40s and 50s.
  4. If you aren’t from the US, it makes a lot of sense to still invest in your home market, but go for a higher international allocation. For example, if you are from the UK, you could invest 30% in the FTSE All Shares and 60% in a global world ETF, and 10% in government bonds, and again, increase your allocation of government bonds as you age.
  5. If you want property, go for REITS. A portfolio including REITS for an internationally minded investor might look something like this:

Older person:

10%- Global REIT ETF. Either iShares or Vanguard

55% – Vanguard Total World Stock Market ETF

35% – Vanguard short-term inflation protection securities ETF

Younger person

15%- Global REIT ETF. Either iShares or Vanguard

75% – Vanguard Total World Stock Market ETF

10% – Vanguard short-term inflation protection securities ETF

You could also add 5%-10% emerging markets as well.

How should a person in their early 20s invest their money?

Financial investments

  1. No market timing
  2. Focus on index funds
  3. Always be invested.
  4. Never stock pick
  5. Never speculate

Self-Investments

  1. Read

Read the evidence on personal finance. I recommend these two and some others as below:

Paul Farrell – The Lazy Person’s Guide to Investing: A Book for Procrastinators, the Financially Challenged, and Everyone Who Worries About Dealing With Their Money

Burton Malkiel and Charles Ellis. The Elements of Investing

Larry Swedroe. The Only Guide to an Investment Strategy You’ll Ever Need

Larry Swedroe. The Quest For Alpha: The Holy Grail of Investing

John Bogle, The Little Book of Common Sense Investing : Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits)

William Bernstein. The Four Pillars of Investing: Lessons for Building a Winning Portfolio

John Bogle – Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor

John Bogle’s “The Clash of the Cultures”

David Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

Lawrence Cunningham. The Essays of Warren Buffett: Lessons for Corporate America, Second Edition

“Security Analysis” by Benjamin Graham

Benjamin Graham’s “Intelligent Investor.”

Carl Richards, The Behavior Gap, Simple Ways to Stop Doing Dumb Things with Your Money.

Thinking Fast and Slow, Daniel Kahneman

Extraordinary Popular Delusions and The Madness of Crowds, Charles Mackay.

The Essays of Warren Buffett

For more academic work on how the 4% rule works in practice, I would recommend the following:

Sustainable Withdrawal Rates From Your Retirement Portfolio, by Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz – http://afcpe.org/assets/pdf/vol1…

Other academic books to look at include:

Bengen, W. P. (1994). Determining withdrawal rates using historical data. Journal of Financial Planning, 7(1), 171-180.

Bengen, W. P. (1996). Asset allocation for a lifetime.Journal of Financial Planning, 9(3), 58-67.

Bengen, W. P. (1997). Conserving client portfolio during retirement, part III. Journal of Financial Planning, 10(5), 84-97.

Bierwirth, L. (1994). Investing for retirement: using the past to model the future. Journal of Financial Planning, 7(1), 14-24.

Cooley, P. L., Hubbard, C. M. & Walz, D. T. (1998). Retirement spending: choosing a sustainable withdrawal rate. Journal of the American Association of Individual Investors, 20(2), 16-21.

Ferguson, T. W. (1996). Endow yourself. Forbes, 157(12), 186-187.

Ho, K., Milevsky, M. & C. Robinson. (1994). Asset allocation, life expectancy, and shortfall. Financial Services Review., 3(2), 109-126.

Ibbotson Associates (1996). Stocks, bonds, bills, and inflation yearbook. Ibbotson Associates, Chicago, IL.

Ibbotson Associates (1998). Stocks, bonds, bills, and inflation yearbook (CD-ROM V ersion). Ibbotson Associates, Chicago, IL.

Lynch, P. (1995). Fear of crashing. Worth 2(1), 79-88. Scott, M. C., (1996). Assessing your portfolio allocation from a retiree’s point of view. Journal of the American

Association of Individual Investors. 18(8), 8-11.

For some non-investing books that I have found useful to understand human behavior, which indirectly affects investing choices and often leads to bad choices, I would suggest the following books:

Dale Carnegie, How to Win Friends and Influence People

Nassim Taleb, Fooled by Randomness

Shaan Patel, Self Made Success

2. Get a formal education

If you want more options, getting educated to degree level (if you haven’t already) is important. I couldn’t have gotten several visas if it wasn’t for my degree.

3. Your health

Your health is your wealth. Being healthier by giving up the booze, smoking and other things will be good for your health and your money.

4. Your network

Your network is key to business. Knowing people, online and offline, through networking can be key.

What investing advice would you give to yourself at 20, 30, and 40 years old?

Age 20s

  • Invest now. No delays
  • In terms of asset allocation have 100% in stocks or 90% at least
  • 0%-10% in bonds
  • Don’t put down a deposit for a house
  • Get good at a job. Then consider starting your own business, not the other way around
  • Ideally, wait until 30+ to get married
  • Learn habits like delayed gratification
  • Keep reading and learning after university
  • Have good spending habits

Age 30s

  • Keep 90%-10% asset allocation between stocks and bonds
  • Increase how much you invest as you become high-income (hopefully)
  • Only buy a house if you want to settle in one location – in other ways use it as a home

Age 40s

  • Assuming you have done the right things in your 20s and 30s, you can start to increase your bond allocation by 45–50
  • Keep investing. Just like at 20–30, no need to market time or stock pick
  • Try to avoid a mid life crisis, divorce and remarriage, that leads to so much wealth destruction

Remember too, that things don’t change so quickly in investing;

How should a 29 year old invest $20,000 profitably?

You are only 29, so you don’t need to care about market volatility. Put 90%-100% in a total stock market/world index/S&P, and 10% in government bonds.

Increase the bond allocations over 40 and especially 50. Or follow these model portfolios:

Model portfolios for American citizens and expats under 40 –

60% US Stock Markets,

20% International stock markets,

10% Emerging stock markets

10% US short-term government bonds

Model portfolios for American citizens and expats over 40 –

50% US Stock Markets,

20% International stock markets,

5% Emerging stock markets

25% US government bonds

Model portfolios for American citizens and expats over 55 or close to retirement –

50% US Stock Markets,

20% International stock markets,

30% US government bonds

Model portfolios for British citizens and expats under 40 –

40% UK FTSE All Shares

40% International stock markets,

10% Emerging stock markets

10% Global government bonds index

Model portfolios for British citizens and expats over 40 –

35% UK FTSE All Shares

35% International stock markets,

5% Emerging stock markets

25% Global government bonds index

Model portfolios for British citizens and expats over 55 or close to retirement –

35% UK FTSE All Shares

35% International stock markets,

30% Global government bonds index

Model portfolios for European citizens and expats under 40 –

40% Euro Shares

40% International stock markets,

10% Emerging stock markets

10% Global government bonds index

Model portfolios for European citizens and expats over 40 –

35% European All Shares

35% International stock markets,

5% Emerging stock markets

25% Global government bonds index

Model portfolios for European citizens and expats over 55 or close to retirement –

35% European All Shares

35% International stock markets,

30% Global government bonds index

From the above figures, one can work out what kind of portfolio you should be aiming at, depending on your nationality. If you are from a country which hasn’t got a history of

For investors who want a diversified portfolio which includes REITs and international stocks, I would suggest the following portfolio:

10%- Global REIT ETF. Either iShares or Vanguard

55% – Vanguard Total World Stock Market ETF

35% – Vanguard short-term inflation protection securities ETF

What is the best investment advice for a teenager?

People shouldn’t be investing until they have read the evidence. Reading in your teens is a great choice.

So many people DIY out there without reading real evidence, and then wonder why they fail.

By fail I mean only getting a maximum of 2%-5% when markets have averaged 10%+.

It is human nature to allow emotions such as fear, greed and egotism get in the way. Overconfidence is one of the biggest killers of portfolios.

Barber and Odean in a 2000 paper show that “after accounting for trading costs, individual investors underperform relevant benchmarks. Those who trade the most realize, by far, the worst performance. This is what the models of overconfident investors predict” (http://faculty.haas.berkeley.edu…)

Then with a different data set, Odean [1999] finds that “the securities individual investors buy subsequently underperform those they sell.

When he controls for liquidity demands, tax-loss selling, rebalancing, and changes in risk aversion, investors’ timing of trades is even worse. This result suggests that not only are investors too willing to act on too little information, but they are too willing to act when they are wrong.

These studies demonstrate that investors trade too much and to their detriment” (http://faculty.haas.berkeley.edu…)

It is human nature for people to think they are smarter than the average, and can stock pick. Pick the winner, those individual stocks that will outperform. Shows such as CNBC and Bloomberg also encourage investors to think they cant time the markets.

Consider something for a moment. If you stock pick (individual stocks) rather than buying funds, you have an 80%+ chance of losing to the market over a 5 year period. That goes down to about 98%+ over a 40 year + investment career. There are many reasons for this. Even small costs of buying and selling build up.

Good short-term returns, moreover, increase egos, and complacency comes into play. One of the biggest reasons is that the information is all there transparently, so there is no such thing as a free lunch.

Remember, all the information about companies is publicly available and there are people whose job it is to look at this information and weight the pros and cons of all that information.

Take tech as an example. It was true in the 1990s that those IT geeks who correctly predicted the future, could have made tones of money. Certainly early investors in Facebook or Amazon did.

However, it would have been madness to put a significant percentage of your wealth in Amazon in 1995. A rational investor can only make decisions based on the information he or she has available at the time.

Predicting the future is almost impossible and those who get it right once, probably won’t next time. There are so many unknown unknowns and know unknowns for all companies, and especially start-ups.

If Amazon’s CEO would have died 20 years ago, or there would have been a huge scandal or employees would have joined a competitor on mass, the company would never have succeeded. Who knows, maybe Amazon almost went bust early on before they publicly revealed information which only becomes a legal requirement once it goes public.

And more to the point, even though tech has on average done well over the last 20 years, most tech firms have gone bankrupt. Buying the market and a broad basket of companies isn’t speculating. It is just assuming that, like always, in the long-term, the biggest 100-200-300 companies in the US or elsewhere will be worth more money in 10-20-30 years than today.

So regardless of whether in 2050 most of the S&P is financial services, law, consumer goods or even bitcoin mining companies (i doubt that though!), an investor who buys the market will profit.

They just won’t profit as much as somebody who invests 100% of their wealth in the one coin that beats the market! One of the reasons the average DIY investors only makes on average 4%-5% per year when markets have gone up (historic average) 10% per year, is because they assume they are smarter than others due to `research`.

It is human nature to think you are smarter than the average, but the academic evidence is clear that enhanced knowledge won’t allow you to consistently beat average market returns. You will almost certainly beat the market some years, but on average, you will lose long-term.

Beyond that, self-motivation is an issue even for people who are hard-working. Most of the people reading this have probably gone to the gym, tried to lose weight and/or gain muscle. How many have successes? How many of people reading this have remained constantly motivated day in day out, year in year out? That is tough, but being a rational investor, requires that kind of discllipine.

It is isn’t egotism and lack of self-motivation that causes us to trade more. Panic and greed also play a part. It is a natural human emotion to want to invest more when markets are going well, or sell when markets are down or at least to stop contributing. Studies that shown that if you tell somebody that they have a 95% chance of making money, they are more likely to invest than if you tell them they have a 5% chance of losing money.

The 1990s also didn’t help. During the fantastic winning run for stocks, especially in the technology stocks on the NASDAQ, many people with little or no knowledge made a lot of money from stocks. Anybody can make money in a bull market, and this gives people overconfidence.

Here are some books to read:

Paul Farrell – The Lazy Person’s Guide to Investing: A Book for Procrastinators, the Financially Challenged, and Everyone Who Worries About Dealing With Their Money

Burton Malkiel and Charles Ellis. The Elements of Investing

Larry Swedroe. The Only Guide to an Investment Strategy You’ll Ever Need

Larry Swedroe. The Quest For Alpha: The Holy Grail of Investing

John Bogle, The Little Book of Common Sense Investing : Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits)

William Bernstein. The Four Pillars of Investing: Lessons for Building a Winning Portfolio

John Bogle – Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor

John Bogle’s “The Clash of the Cultures”

David Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

Lawrence Cunningham. The Essays of Warren Buffett: Lessons for Corporate America, Second Edition

“Security Analysis” by Benjamin Graham

Benjamin Graham’s “Intelligent Investor.”

Carl Richards, The Behavior Gap, Simple Ways to Stop Doing Dumb Things with Your Money.

Thinking Fast and Slow, Daniel Kahneman

Extraordinary Popular Delusions and The Madness of Crowds, Charles Mackay.

The Essays of Warren Buffett

For more academic work on how the 4% rule works in practice, I would recommend the following:

Sustainable Withdrawal Rates From Your Retirement Portfolio, by Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz – http://afcpe.org/assets/pdf/vol1…

Other academic books to look at include:

Bengen, W. P. (1994). Determining withdrawal rates using historical data. Journal of Financial Planning, 7(1), 171-180.

Bengen, W. P. (1996). Asset allocation for a lifetime.Journal of Financial Planning, 9(3), 58-67.

Bengen, W. P. (1997). Conserving client portfolio during retirement, part III. Journal of Financial Planning, 10(5), 84-97.

Bierwirth, L. (1994). Investing for retirement: using the past to model the future. Journal of Financial Planning, 7(1), 14-24.

Cooley, P. L., Hubbard, C. M. & Walz, D. T. (1998). Retirement spending: choosing a sustainable withdrawal rate. Journal of the American Association of Individual Investors, 20(2), 16-21.

Ferguson, T. W. (1996). Endow yourself. Forbes, 157(12), 186-187.

Ho, K., Milevsky, M. & C. Robinson. (1994). Asset allocation, life expectancy, and shortfall. Financial Services Review., 3(2), 109-126.

Ibbotson Associates (1996). Stocks, bonds, bills, and inflation yearbook. Ibbotson Associates, Chicago, IL.

Ibbotson Associates (1998). Stocks, bonds, bills, and inflation yearbook (CD-ROM V ersion). Ibbotson Associates, Chicago, IL.

Lynch, P. (1995). Fear of crashing. Worth 2(1), 79-88. Scott, M. C., (1996). Assessing your portfolio allocation from a retiree’s point of view. Journal of the American

Association of Individual Investors. 18(8), 8-11.

Beyond that, take a look at the history of the US Stock Market or even a recent history, and compare it to other assets like the graph below:

Don’t fear volatility. It is funny yesterday I was reading this book:

It is a classic called Business adventures which Buffett and Bill Gates both love. In the book, the book tells a story (one of the many stories in the book) about how a `market crash` in 1965 panicked investors.

In an era before the internet, brokers in US had panicked calls from Rio in Brazil through to LA in USA, with a simple message `please sell everything`.

Do you know how much the Dow was worth then? About 500! The Dow hit 26,600 this year. The US markets have consistently produced 10%, and 6.5% after inflation.

Stock market corrections and crashes are normal – List of stock market crashes and bear markets – Wikipedia . But most people can’t stand the volatility.

Beyond just staying in markets rather than trying to dance in and out of them, also consider your spending habits. They matter just as much as your investment returns for your total returns.

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