2020 has been an extremely volatile year as far as the stock market goes. Thanks to the Coronavirus pandemic, the S&P 500 hit its 2020 low (to date, at least) on March 23rd, 2020. The low was a 35% decrease from its recent 52-week high.
Young people that saw the great recession firsthand in 2008 and 2009 may not have had the ability to start investing back then. I was in college in 2008, so I definitely didn’t have any spare money to invest.
When I graduated in 2009, I didn’t start my first job until the fall which was months after the stock market low in March of 2009. While I started investing with my first paycheck, I didn’t get to take advantage of the lowest investment prices. I didn’t have much to invest, so I wasn’t making crazy money in the markets.
What came after the 2009 lows were outstanding returns up until the recent coronavirus drop. This time, it seems young investors don’t want to miss out on the potential future returns from this drop.
Here’s what you need to know about this new trend to see if it is something you should be taking part in.
Investing apps grow due to new interest in investing
One of the biggest signs that people don’t want to miss out on the Coronavirus stock market carnage is new account sign-ups at brokerage firms. According to recent reports, TD Ameritrade added 608,000 new accounts, E*TRADE added 363,000 accounts (a record) and Charles Schwab added 609,000 new brokerage accounts in the first quarter of 2020 alone.
With just these three firms, over 1.5 million accounts were added in three months. But that’s not where the excitement stops for brokerage firms and investing apps. Venture capital-funded investing apps are raising more money to continue growing, too.
Stash, an app that allows you to start investing with no minimum deposit, raised $112 million in investment capital which values the company at over $800 million. Robinhood, an app that allows free stock trades, raised $260 million in investment capital valuing the company at over $8 billion.
These investment apps continue to have growing valuations even in tough economic times. This could be viewed as a sign that venture capital investors believe more people will continue to invest even throughout this crisis.
Why young people should be investing
Compounding returns is the process of your returns earning even more returns. If you have a penny on day one and double it every day for 30 days, you’d end up with over $5 million. While you can’t double your money every day with investing, you can grow your wealth enormously.
To help you understand the power of compounding returns, here’s a quick example.
- John invests $5,000 per year from age 25 until he turns 35. When he turns 35, he decides never to invest again.
- Holly puts off investing until she turns 35. Then, she invests $5,000 per year every year until she turns 65.
You’d think Holly would have more money because she invested more. Unfortunately, that’s not the case. Both John and Holly earned the same exact returns every year. Based on an 8% annual return, John would have almost $800,000 at age 65 while Holly would only have a little over $600,000 at age 65.
John only invested for 10 years, but Holly invested for 30 years. Holly invested three times as much money, but John ends up with more money overall. The difference is John started 10 years earlier than Holly did.
Why does this matter? The returns you earn add to the amount you have invested each year. They then earn even more returns in future years. In the beginning, this may not seem like a big deal. However, when you get to year 30, 31, and so on, the annual returns are huge.
In this example, John’s returns in his year 30 are exceeding Holly’s contributions and returns in what is her 20th year. In John’s 30th year, he earns over $25,000 in returns alone. Holly contributed $5,000 and earned about $16,700 in returns in the same year, her year 20. Combined, Holly’s total account growth was roughly $21,700 versus John’s over $25,000.
This is why it is so important to start investing early. The compounded returns provide enormous value the longer you invest.
I saw this example in one of my college classes and realized I wanted to be more like John. For that reason, I made it a priority to open a Roth IRA as soon as I could after starting my first job. I’ve contributed to it every year since and it has been one of the best decisions I ever made.
What the financial experts say about investing
Before people start investing, they often want to know they’re investing at a good time even though the long-term trends say you should just start. They turn on investment news networks such as CNBC or read articles online to try to determine if now is a reasonable time to invest.
I’ve got some bad news for you. No matter when you look at investment news, you can almost always find a financial expert that is saying what you want to hear. Some experts are always saying the market is due for a drop in the near future. Other professionals give reasons why markets should continue going up.
Before the coronavirus-related market drop, people had been calling for a stock market crash and recession for years. Were the people who said we’ve hit a top right before the market started dropping in late February smarter than those who had called for a drop earlier? No. They just got lucky and stated their ongoing opinion on the right day.
For this reason, it’s best not to listen to experts that try to predict the future in the short-term. No one has a crystal ball to determine exactly when we’ve hit a high or a low. Instead, focus on experts that use objective data to discuss long-term investing.
One of my favorite resources to help people understand the impacts of investing is JP Morgan’s Guide to Retirement. It offers a few pages of investing related charts that help you understand some important investing concepts. In particular, look at pages 37, 41, and 43.
Worried about investing at the peak? Dollar-cost averaging can help
If you aren’t investing already, most people would be best off starting today no matter where the markets are. Historically, the stock market continues to grow over the long-term regardless of where we currently are.
There may be times where the market isn’t hitting all-time highs. The markets may even decline by large amounts. Even so, the market has always ended up hitting new highs eventually.
If we are at a temporary peak in investment prices today and you start investing, it isn’t the end of the world. If you regularly invest, such as a small amount every paycheck, you’ll continue buying investments as their prices decline. When we hit new highs, all of your investments will be worth more than when you bought them, assuming you didn’t sell or change investments.
The process of investing small amounts over time is called dollar-cost averaging. By buying consistently, you’ll end up buying some when investment prices are high as well as some when investment prices are low and at prices in between. Thanks to the long-term trend of investments always growing, your investments will eventually be worth more.
Of course, the past isn’t a perfect predictor of the future. If this 100+ year trend breaks, you could lose money investing. You can also lose money if you aren’t properly diversified or if you panic sell when investment prices decline.
Steps toward successful investing
So if you’ve decided it’s time to start investing, where should you invest? Before you get started, you need to do a few things to set yourself up for success.
First, create an investment plan
When you first start investing, it’s easy to skip to the exciting part. Before you do, it’s probably best to set up an investment plan. Don’t let this scare you. It doesn’t have to be complicated.
Why are you investing?
First, decide why you are investing. What is your goal? How much do you need to invest to reach that goal?
What type of returns are you looking for?
Next, decide what type of returns you need to meet your goal. Are those returns realistic? Or do you need to invest more to reach your goal?
Both of these tasks can be much easier when using an investment calculator to help get an idea of what it takes to reach your goals.
How much risk are you willing to take?
Finally, figure out your risk tolerance. How willing are you to accept big losses temporarily to get better gains over the long term? If you would end up selling your investments when they decrease drastically, you have a lower risk tolerance than someone that wouldn’t.
Risk tolerance quizzes can help you get an idea of how much risk you can handle with your investments.
Investing can be extremely personal. If you don’t feel comfortable coming up with this yourself, it may be a good idea to consult a fee-only financial planner to help build your financial plan before you start investing.
Choose investments that meet your goals
Based on the first part of your investment plan, you now need to figure out what to invest in. When considering investments, look at both their potential future return as well as their riskiness.
Personally, I like to invest in well-diversified index mutual funds. These track a major index, such as the S&P 500, to match the returns of the index. You won’t hit a home run with these investments.
Diversification can help you prevent significant losses from investing in an individual company, such as one that goes bankrupt. Due to the financial strain of the coronavirus impacts, many companies may end up going bankrupt in the future, causing shareholders of these individual companies to have significant losses.
Start to invest regularly
Once you have an investment plan and have picked your investments, it’s time to start investing regularly. Don’t pay attention to short-term market changes. Set a schedule and invest consistently on that schedule.
Make sure to reevaluate your investments on a regular basis to make sure they’re still suitable for you, as well.
Where young people should be investing
If you’re ready to start investing, here are a few places you may want to consider opening an account to get started.
Compared to Fidelity and E*TRADE, Robinhood is a fairly new company that was founded in 2013. Robinhood’s goal was to open investing to everyone, not just the wealthy. They did this by offering no-cost trading, which at the time was unheard of. Now, most major investment firms provide free trading to their clients thanks to the pressure from Robinhood.
Even though the big names have mostly moved to free trades, Robinhood still sees great growth. The platform is popular among younger investors and is often quoted in the news. They allow you to invest in stocks, exchange-traded funds, options, gold, and even cryptocurrency.
Robinhood offers a great resources section to help you learn everything you need to know about investing. Examples of resources include explainer articles about topics such as “What is dividend yield?”, “What is revenue?” and “What is an exchange-traded fund?”.Advertiser Disclosure – This advertisement contains information and materials provided by Robinhood Financial LLC and its affiliates (“Robinhood”) and MoneyUnder30, a third party not affiliated with Robinhood. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Securities offered through Robinhood Financial LLC and Robinhood Securities LLC, which are members of FINRA and SIPC. MoneyUnder30 is not a member of FINRA or SIPC.”
E*TRADE is another large investment company that has a very established track record. E*TRADE was founded in 1982, which is an extremely long time for an internet-based brokerage firm.
This firm offers a wide range of investments, $0 commission trades on most investments, and an intuitive platform to make trades. E*TRADE usually focuses on self-directed trading, which means you pick what you invest in, when to buy, and when to sell. However, they have a managed portfolio option if you’d rather have technology manage your investments for you.
In addition to their platform, E*TRADE has a vast knowledge database you can access so you can learn how to start investing. They teach you basic knowledge concepts, where to invest based on your investing timeline, tax planning, and other complex topics, as well. You don’t even have to open an E*TRADE account to get access to these resources.
Investing through retirement savings accounts
If you’re still hesitant to invest right now, you could instead shift your focus to saving for retirement. The money you contribute to your retirement accounts today will have plenty of time to grow over the coming decades. When it’s time to retire, you’ll have the money in place.
An important first step, if you aren’t already setting money aside for retirement, is to check with your employer. You may have opted out of a retirement savings option when you started your job. Find out what’s involved in getting started today. If your employer doesn’t offer a plan, you can set up an IRA and begin contributing on your own.
Once your retirement accounts are in place, Blooom can help you monitor it all. In just minutes, you can connect to your accounts and monitor their performance, all in one place. This app is free and supports IRAs, 401(k)s, 403(b)s, 401(a)s, 457s, or TSPs.
It’s important to note that although blooom can link up to your employer-sponsored plans, your IRAs will need to be with Fidelity, Charles Schwab, or Vanguard to take advantage of Blooom’s account management features.
The coronavirus sell-off has sparked a new interest in investing for many young people looking to take advantage of the downturn. Brokerage firms and investing apps are showing strong demand in the first quarter of 2020. I believe this is a good thing as young people should start investing.
You shouldn’t be looking to get rich quick, though. Instead, focus on the long-term goals and build an investment plan to start investing regularly. Once you’re ready, open an investment account and get started.
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