For Younger Generations: Why Investing NOW is SO Important

Younger savers often wonder whether it’s too early to begin thinking about their financial future. A portion of the group possesses a “YOLO” attitude preferring to dedicate their leftover cash to living their life to the fullest today, like jaunting the globe, rather than funding their 401ks. More commonly, however, Millennials and their younger counterparts have been financially burned and have developed a skeptical view of money and investing; they navigated two bear markets, the ’08 Housing Crisis, and the Covid-19 pandemic, during their most formative years. Others are strapped with student debt or living in high-cost areas that erode their earnings. And some are intimidated, believing they have not gathered enough assets to invest. No matter the personal attitudes or circumstances, young savers are in the ideal stage of life to begin exploring and building their financial future. Furthermore, we posit that it is imperative for the youngest generations to take matters into their own hands and begin a savings regimen as soon as possible.

The Eighth Wonder of the World

In his book, The Psychology of Money, Morgan Housel discusses that while Warren Buffett may be a phenomenal investor, by successfully picking companies that generated value, his fortune is more a result of being a decent investor for a long period of time. Like the king of value investing, young adults have longevity in their toolbox and can greatly benefit from a concept known as compounding.

Once described as the eighth wonder of the world by Albert Einstein, compounding is a repetitive process by which the money you’ve saved and invested, along with the interest you earn, together generate investment gains (over and over and over). To paint a clearer picture of the concept of compounding, Morgan Housel compares money compounding to compounding observed in nature1. Earth’s ice ages begin when the summer never gets hot enough to melt the previous winter’s snow, and the “… leftover ice base makes it easier for snow to accumulate the following winter, which increases the odds of snow sticking around in the following summer, which attracts even more of the sun’s rays, which exacerbates cooling, which brings more snowfall, and on and on” (Housel, page 48). The key takeaway is that, as in nature, small, repeated growth can fuel, snowball, or compound exponential financial results in the future. Younger savers have the advantage of time, and any invested amount is better than none.

If You Know How to Count, Then Count on Yourself

Pensions once served as the bedrock of retirement planning. Unfortunately for younger folks, these are fast disappearing.

There are other demographic pressure factors to also consider, including longer lifespans for our elderly and fewer children being born today. As a result, the social security trust may be unable to pay full benefits as early as 2034 [2].

As financial security is no longer guaranteed through employer pensions and government programs, the quality of Millennials’ retirement rests squarely on their own shoulders.

Cash is Not King

About half of all Millennials invest for retirement [3]. Of this group, approximately a quarter identified cash as their favorite investment [4]. The reluctance to participate in the market and invest can have detrimental long-term consequences. Without a doubt, while investing in stocks entails greater volatility, stocks are the major vehicles of asset growth over long periods of time. The U.S. stock market has delivered an average annual return of around 10% since 1926 [5].

Sitting on the sidelines in cash or skewing too heavily toward “safe” investments, like bonds, can mean millions of dollars lost for the Millennial generation.

Closing Remarks

There is a difference between risk tolerance and risk capacity. Millennials may have a low-risk tolerance, or appetite, which means the group may not be willing to emotionally accept risk and volatility. The group may have some scrapes and bruises related to their financial experiences, or they may feel too strapped to invest, which makes them more risk-averse. However, due to their age and long-time horizon, Millennials have a higher risk capacity. Risk capacity is the amount of risk and volatility one can financially withstand. Risk capacity is comprised of several factors, most notably the investment timeline. Young savers should weigh both risk tolerance and risk capacity as they determine the appropriate path forward. Remember, time is money.

[1] The Psychology of Money: Timeless Lessons on Wealth, Greed and Happiness by Morgan Housel.

[2]  NPR.org - “A New Report Says the Covid Recession Has Pushed Social Security Up a Year”.

[3] Yahoo Finance - “43% of Millennials Arent’s Investing – And That’s a Problem”.

[4] The Balance - “How Millennials Can Invest $10,000”.

[5] Bankrate.com - “Time is on your side: A Guide to Start Investing with Confidence”.

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