For many young adults, it looks easier to put off any investing choices
until their financial situation becomes at least theoretically, more stable.
Twenty-somethings, however, are actually in a prime position to enter the
investing world, even with college debt and low salaries.
Time
While money may be tight, the young adults have a time advantage.
But there is a reason that compounding the ability to grow an
investment by reinvesting the earnings was referred to by Albert Einstein as
"the eighth wonder of the world." The magic of compounding allows
investors to generate wealth over time, and requires only two things: the
reinvestment of earnings and time.
Take More Risk
An investor's age influences amount of risk he or she can
withstand. Young people, with years of earning ahead of them, can afford to
take on more risk in their investment activities. While individuals approaching
retirement years may gravitate towards low-risk or risk-free investments, such
as bonds and certificates of depos, young adults can build
more aggressive portfolios that are subject to more volatility and
stand to produce larger gains.
Learn by Doing
Young investors have the flexibility and time to study investing
and learn from both successes and failures. Since investing has a fairly
lengthy learning curve, young adults are at an advantage because they have
years to study the markets and refine their investing strategies. As with the
increased risk that can be absorbed by younger investors, so too can they
overcome investing mistakes because they have the time needed to recover.
Human Capital
From an individual's perspective, Human Capital can be said to be the present
value of all future wages. Since the ability to earn wages is fundamental
to investing and saving for retirement, investing in oneself by earning a
degree, receiving on the job training or learning advanced skills is a valuable
investment that can have strong returns. Young adults often have many
opportunities to increase their ability to earn higher future wages, and taking
advantage of these opportunities could be considered one of the many forms of
investing.
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