Investing Under 30? You Will Want Some Of This

That’s what you do when you invest. You transform your money into more money. You work hard to earn your salary, now make it work hard for you.

 

There is no magic here. No smoke and mirrors. In this blog I will show you how – it can also be fun!

 

When you are in your 20’s you probably don’t have much or any money as a lump sum, but for savings for a deposit for your own place – keep this money safe in a deposit account. But if you have a bit of spare cash at the end of every month, that is what you can commit to invest every month.

 

 

I will start by enticing you with the huge potential. This answers the “why?” question.

 

For the sake of argument, I am assuming you will regularly invest £200 per month. The younger people tell me this is a decent target – some told me £300, but I have stuck with £200.

 

I will come back to the issue of what growth you might expect on that money, and why. For now, I am assuming two alternative growth rates, 4% and 8% each year.

 

Below is a graph showing you the massive difference in how your money grows depending on the year on year percentage growth. You can also see vividly how this gap widens hugely as time goes on – this is the power of compounding.

 

 

To make it easier to see points in time, below is a table. After 10 years you can see that the value is now in the region of two years of your net salary! I repeat, that is after just 10 years. Fancy a gap year in your 30’s? You’ve just made that possible.

 

 

I hope that has got your attention.

 

 

You might already be excited by the potential for making a million - fast.

 

Or you are less excited in the short term, but know long term saving makes sense - perhaps your parents drummed this into you, as have most parents for generations past.

 

Either way, before you jump to do anything, do some basic groundwork. It’s nothing too heavy, but before you invest you do need to learn some basics.

 

Here are some fundamentals, giving you a great sense of the potential to grow your savings, but also the ups and downs you can expect over shorter periods.

 

Here are some details on the actual success of savers and investors into the stock market. (This is chapter 10 from my book Clueless).

 

Give yourself a little time read those linked blogs. Do feel free to get back to us with your thoughts or questions on these.

 

 

Investing monthly is a great idea in itself. You have a direct debit from your bank account, which provides the discipline, so that you don’t have to take any action each month. But invest into “what”?

 

When you are investing monthly you must invest into funds of one kind or another. 

 

For example, stock market funds are a great way to invest into the stock market. They spread your money across shares of many individual companies, typically 50-100.

 

This spread (or diversification) means that you can’t lose all of your money - which you most certainly can if you buy shares of only one company.

 

 

Funds give you a powerful but still straightforward solution.

 

That partially answers the “what?” question.

 

You also want to know if there is one area for investing which looks particularly attractive right now for your monthly investing, say looking 10 years ahead.

 

 

One great team of researchers based in the US (GMO) regularly calculates the returns for different types of investments around the world in the 7 years ahead. They reckon that by far the best returns over the next 7 years should come from being invested into emerging market funds, that is the stock markets in less well-developed nations around the world. They project returns at over 10% per annum. In contrast their projection for the world dominating US stock market is for returns to be negative year on year. 

 

10% a year is a superb return. Only a projection of course, but based on sound, objective, analysis with an excellent track record – which makes them in a small majority in the financial services industry!

 

“Emerging markets” sounds risky. But when you are investing monthly this is not of great concern. In fact, it can certainly play into your hands because when prices are lower, with your monthly savings you simply buy more of the fund – because the fund is cheaper. This is an exciting journey in prospect – and being young you also have the luxury of time.

 

I wish someone had presented me with these GMO numbers in 1990. Just before that I started monthly investing myself into one of the, then, very few emerging market funds. I did this for the next 10-15, also for many clients. It was fantastically profitable. If I had seen something like those GMO numbers in 1990, I would have saved a lot more every month!

 

It appears that another great period for investing into emerging markets is at hand.

 

For sure this is not the only such opportunity. Closer to home, I can see a very exciting opportunity in dynamic UK smaller companies as the post-Brexit rebuilding begins. Similarly, in Chinese and Asian smaller companies.

 

Why smaller companies? And what about actual fund recommendations in each of these areas?

 

I will look at this next week, along with what some real young investors are doing today, and the prickly issue of "risk".