That is why it is so important that Gen Y investors take advantage of the opportunity to invest, especially in tax-advantaged accounts like 401(k) and IRAs, early on in their careers. When the tax laws are working with you, the odds are put in your favor no matter where you decide to invest. The traditional argument for saving early (and often) in one's adult life is compound interest. Which is of course is true. That being said it is unlikely that Albert Einstein ever said compound interest was "the most powerful force in the universe."
In my book, Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosophere, I write that "savings is the best investment." By that I mean that it is far easier to generate additional savings through more conscious consumption than it is to generate additional returns, or alpha, from the financial markets. So starting early with a dedicated plan to live below your means is an important part of any comprehensive financial plan.
More importantly as a young investor you get a chance to make your novice investment mistakes while the stakes are, in actual dollar terms, relatively low. Or as said in a different context, "You only get one chance to be a beginner." Wouldn't you rather experience your first bear market when you are 25 and you have $5,000 in your 401(k) plan than when you are 50 and retirement is beginning to stare you in the face? The experience gained when you are young will help you when the stakes are ratcheted up later on in your career.Read it at The Reformed Broker
Compound Experience, Not Just Interest
By Tadas Viskanta of Abnormal Returns
My interest and excitement for the financial markets began at the early age of 13 when my grandparents gifted stocks (Coke and Disney) as a Bar Mitzvah present. During high school, in the midst of the dot-com bubble, I learned about the stock market and practiced investing online with fake money portfolios. When that bubble burst, I felt fortunate to not have been trading with real money.
After turning 18, having saved up a bit of money, I opened a 401(k) and decided to try my hand at real investing. During college I invested on my own account and continued adding money to my 401(k). Over the summers I enjoyed internships at a day-trading firm, hedge fund and with financial advisors. Following college I took a full-time job as a trader at an options market-making firm. Little did I know that the housing bubble had already gone bust and the stock market was nearing its peak. With real money now on the line, the following 60% drop in stock markets was painful to witness.
Markets have now recovered most of the losses from that second bubble of the decade, but remain at levels first seen 13 years ago. Although I don’t know how the future will play out, I personally am very grateful that my first two bear markets occurred before I turned 25 and had significant money on the line. The experiences have already made an enormous impact, not only on my investing strategy, but also on my career.
For my fellow Gen Y investors, I fully recommend taking the above advice from Tadas to heart. Start early with plans to conserve your consumption and open a 401(k) (You can take money out of the 401(k) without any penalty to use as a down payment on your first home). Only invest a limited amount, at first, until you become aware of how you will respond in a bear market (if you want or need to sell after steep losses you are taking too much risk). Lastly, do not use any leverage until you’ve gained significant experience since it will likely compound losses from your mistakes.
In my opinion stock markets are still not out of the woods from this secular bear market. That means at least one more cyclical bear market before the next secular bull market begins. Hopefully other Gen Yers will take advantage of this opportunity and these lessons to ensure we’re prepared well in advance of the day when retirement comes.