We’ve discussed why millennials shouldn’t be scared of stocks. Hopefully, many of you were encouraged by the fact that historically, the stock market works like Newton’s law of gravity but in reverse: what goes down inevitably comes back up. This means that while stocks do fluctuate and can be volatile, sharp declines are followed by even sharper recoveries. On average over the period of time it has existed, the stock market has returned 10%.
Unfortunately, there’s still a stumbling block here that some folks might need help overcoming. Learning more about the historical behavior of the stock market might have eased your fears, but that really only covered the why you shouldn’t be scared and you should invest. We still need to look at the how.
Let’s make this short and sweet: you don’t really need to know how. You do not have to have an expert understanding of stocks to be a successful investor. It sounds crazy, but it’s true! All you need to start investing is a basic understanding of where to start. You can learn as you go.
How is it possible that understanding stocks isn’t a requirement for investing, and that you can learn about all the nuances later? It’s all thanks to the power of compound interest. Because compound interest will exponentially increase your wealth over time, it’s far more important that you start investing now than waiting until later until you feel like you know all there is to know about stocks.
Your money will sit there and compound year after year after year. Time is a powerful factor, which is why it is so much more important that you just start somewhere rather than wait. Any mistakes you make along the way will be but little blips when you look back in 30, 40 years and your investments have grown exponentially. Time will make up for a few missteps and setbacks you might encounter in the beginning when you’re still learning.
Don’t believe it? Let’s say you invested $1000 into a Target Fund Roth IRA at the beginning of this year. You contribute $100 to your Roth every month – and you continue to do so, without fail, for the next 40 years until you’re in your 60s and retired. At the end of that period, assuming a return of 8%, you would have nearly $333,000. Just for contributing $100 per month! Imagine how much more you’d have if you contributed $500 or more per month. (For the record, it’d be a whopping $1,576,000.)
Now let’s assume you wanted to wait to contribute to that Roth IRA. You weren’t sure of how to get started, you never felt like you knew enough about investing to do it yourself.. so you waited. But now you just turned 40 and it’s time to bite the bullet. You know you’ve got to play catch-up with your retirement fund. So you start with $2000 in your Roth IRA and contribute $500 per month. You still want to retire at 60, which means you only have 20 years to contribute, and guess what? At the end of that shortened time period, assuming an 8% return, you’d only have about $283,900, less than what you would have had if you started earlier despite contributing far less every month.
All the extra money you can throw at investments later doesn’t matter, because you’ve lost the most important factor in investing. Nope, that factor is not expert knowledge. There is no secret formula you have to unlock. You have all you need already, because that important factor is time.
It’s crucial that you just start. You don’t have to know everything there is to know. Take advantage of being young and having time on your side. Time, thanks to compound interest, is a far more powerful factor than anything else in determining how wealthy you will be.
(PS – Walking into investing blind is not the same thing as not fully understanding the stock market. If you are totally, completely, hopelessly lost on where to start, take your next off-day and research “simple investing strategies,” or “the only three funds you need to hold.” That should be enough to get you started.)