Why savings will have a greater impact if they're invested1st March, 2021
Mark Ting discusses the merits of “getting rich slow” over “getting rich quick” on CBC’s On the Coast with Gloria Macarenko.
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Commission-free trading apps have made it much easier for millions of first-time traders, who are often young people, to enter the stock market. While I’m very happy that young people are taking an interest in investing and the markets, I’m worried they are taking on too much risk.
Here are some common mistakes made by new investors:
- Overconcentrating in high-risk, speculative strategies (cryptocurrencies, borrowing to invest, option trading). These high-risk, high-reward strategies can be very lucrative in the short term but if things do not go according to plan, they can be financially devastating. I’m not saying to avoid these areas completely, but rather to invest in moderation.
- Being too “active.” Day trading or market timing is very difficult to do successfully and it takes years of experience, nerves of steel and/or sophisticated artificial intelligence.
- Buying penny stocks on smaller stock exchanges which trade for no more than $5, often under $1. There are always exceptions, but for most, including myself, the odds are you will lose most of your investment.
- Blindly following the recommendations of a Reddit or social media influencer. These sources are often quick to tell you about all their successes but downplay their failures/losses. They tend of be very passionate about their choices and focus on capital appreciation potential rather than downside protection. YouTube and Reddit are a great place to learn about investing — just be very selective on who you follow. Some YouTubers that resonate with young people and whose analysis, in my opinion, is well balanced are, Graham Stephen, Andrei Jikh, Minority Mindset, and Griffin Milks (who is also Canadian).
Patience and discipline are key to investing success. The greatest advantage a young investor has is the time they have to allow their investments to grow, taking advantage of compound growth. They don’t need a lot of money for their initial investment, which is good, because most young people I know don’t have large amounts to invest.
The idea is to invest early, often and never stop — even if your friends, social media, or some guy on the radio suggests that the market looks expensive or that the bubble is about to pop. Ignore all the noise, as small but consistent contributions can add up to over a million dollars over time.
If a 22-year-old saved $5 a day until the age of 65, they would accumulate $78,475. This is a lot of money, but it’s $78,475 in future dollars and buying power will be eroded by 43 years worth of inflation.
To make a meaningful financial impact, these savings should be invested. As an example, using the S&P500 index historical average rate of return of 10 per cent, at the age of 65, based on a $5 a day investment, the portfolio would grow to over $1.1M — of which over a million dollars is generated via compound growth.
I’m not naive and I recognize that few people will be able to follow through with this 43-year long strategy. However, the message is the same — if you are young and working, it shouldn’t be too difficult for most to find $5 a day to invest. It might mean foregoing your Starbucks coffee or getting a side hustle to earn some extra money but it’s worth the sacrifice.
My advice for a young person starting out with a long-time investment horizon is to aim for at least $5 a day and invest in index or exchange traded funds of 100 per cent equities. You can afford to take on more risk at a young age — just not excessive risk like leverage or aggressive option trading. Also, it will be difficult, but try not to make premature withdrawals, as they will negatively impact returns.
The math is clear; it doesn’t take much money to become a millionaire as long as you are disciplined and have time on your side. And if things are going well, and you have some extra money, then by all means use this as “play money” to dabble in some more speculative investments like cryptocurrency or your favourite tech stock.
Start small, learn from your mistakes, but always keep investing.
Originally published in CBC’s Opinion section.