Who Should Invest in the Stock Market?

I am constantly asked the basic question: when is the best time to start investing in the stock market? The answer is ridiculously simple – the ideal time to begin investing in the stock market is when you start to earn money as a young adult. For many of us, this could be as early as the age of 15!

Why is Investing at a Young Age so Important?

There are two main reasons I will share with you. If you know about compound interest, then you already know the first answer! Hint: the answer rhymes with “hompound kintrest”…

In addition to compound interest, younger folks can also afford to take substantially more risk with their hard earned money. As highlighted in previous investing articles, the higher risk one takes the greater the potential reward over the long run! This means that when you get to retirement age, you will have a much bigger nest egg if you begin stock market investing early.

The Power of Investing Early in the Stock Market

To illustrate the power of investing early, let’s look at a simple example that compares three different people: Smart Stan, Dumb Derek, and Idiot Isiah. For this example (shown in below), I have assumed an average annual return that decreases over time as these folks age. Remember, you can afford to take more risk when you are young!

Investing at a Young Age

As you can see from the figure above, if Smart Stan starts investing at the ripe age of 15 with $500 a year and follows the same annual contribution plan based on the brackets above, his nest egg could grow to over $6 million by the time he hits 65 years of age. This is based on the returns I have assumed for each age bracket. In total he would have invested about $850,000 in the stock market over those 50 years.

Now, compare with Dumb Derek’s example. If he decides to party like it is 1999 until he is 30, how much would he need to invest to end up with the same amount as Smart Stan by the time he hits the ripe age of 65? Well, Dumb Derek would have to invest almost two times as much to hit that goal ($1.4 million vs. $850,000) Delaying those 15 years means that Dumb Derek will need to invest 1.7 times as much money over the shorter period.

In Idiot Isiah’s case, if he waits until he is 40 to begin investing, he will need to invest nearly three times as much ($2.3 million vs. $850,000 – a delay factor of 2.7x) to match the performance of Smart Stan! Clearly, if you wait too long to begin investing it is nearly impossible to match the performance of investors who got started at an earlier age. In Idiot Isiah’s case, from age 60-65 he would need to be saving $150,000 a year. For most folks, this is impossible!

In all likelihood, the folk who wait to begin investing in the stock market will need to delay their retirement or potentially forgo retirement all together. That is something I hope you can avoid.

Benefits of Learning to Invest in the Stock Market Early

Another benefit of learning to invest in the stock market at a young age is that it helps you to develop good financial discipline. If you can develop the beneficial habit of setting aside a certain percentage of income each month for investing in the stock market, then you will train your subconscious mind not to miss that extra money each month. By making the commitment to invest in the stock market, you will learn to reduce all of your expenses.

As your ability to generate income increases over the years, if you remain disciplined with your stock market investing you will be able to contribute an ever increasing amount to your monthly investment (assuming you continue to devote the same percentage of your income to investing). If you commit to sacrificing a little money up front when you are young, you will rise head and shoulders above just about everyone else as you prepare for your golden years. This approach may also give you the option to retire early or take semi-retirement.