Investing for young people: a guide

August 26, 2020

One of the most common beliefs about investing is that you need a lot of money to start.

Don't have at least 10.000 Euro to chip in? Come back another time.

This discourages many young people who usually have very little money when they are starting out.

So, if you are young and don't have a lot of money, should you just dismiss investing as something that is not for you?

Absolutely not.

It is possible to start investing from a young age, as long as you use the right strategy.

And yes, even if you have a small amount of money.

Let's see how.

What you need to do BEFORE you start investing

If you found this article and you are a person in your twenties, or under 25, congratulations!

Very few people of your age are interested in the investing world.

But if you are here, it is also extremely likely that you have some misconceptions about what it means to invest.

So let's see some important things you need to know BEFORE you start investing.

1. Learn the difference between investing and speculating

The first fundamental distinction to make is between investment and speculation.

From the outside, they seem to be two similar activities.

They both take place in the same field, the financial markets, but the rules that regulate them are very different.

Invest your money does not mean multiplying your capital quickly.

This is what you try to do with speculation.

It is not a bad thing if done properly (even if most people are getting it wrong, will talk about that in another article)

Investing means protecting your capital first, and then growing it, using a repeatable process that works with both 100 Euros and 100,000 Euros.

2. Invest in your human capital

I don't want to lie to you.

Investing for "regular" young people (not tech millionaires) has a big problem.

The expected returns do not have a big impact on your life.

For example, imagine getting an average return of 20% per year from your money. 

An incredible result, which only legendary investors such as Warren Buffett have consistently achieved during many years.

Now imagine that your starting capital was 100 euro.

After one year, you would earn a whopping 20 euros.

In the second year, reinvesting and earning the same exceptional return, you would have an extra 24 euros (20% of 120 euros) for a total of 144 euros.

It's clear that 44 euros in two years don't change anyone's life.

You can save this much money by avoiding going for a pizza 2 times.

Conversely, if the starting capital is 100.000 euros, 20.000 euros and 44.000 euros are much more meaningful numbers, which give you more choices and can help you live the life you want.

Therefore, the very first advice I can give you if you want to start investing and you are young is to invest in your human capital first.

The ability to generate income over time.

It's a more elegant way to say: "Get to work!"

I'm not a business coach so I don't feel like giving you specific advice in this area, but any money invested in a skill that will give you a good income in the future is an investment in your human capital.

In the beginning, you will have to prioritize investing in your human capital instead of spending too much time trying to figure out how to invest what you have.

If you really have no clue about what could be the strategic areas where you can get a job, as of today (August 2020) programmers and salespeople are in great demand, and the best ones can command very high salaries.

But I would like to point out that these are just a couple of ideas.

Today there are a lot of interesting sectors that are looking for skilled workers.

If you are in this group of people, you can earn a good income over time and you will put yourself in the best possible conditions to invest and get tangible results at the same time.

The most important thing is that you choose something you really like or you will never put enough effort and determination into it to succeed.

Buy books, courses, go to events, and meet other passionate people in your chosen field.

(Note: "So good they can't ignore you" is one of the best books I have found that explains these concepts).

The money you invest in your human capital will give you an incredibly higher return.

Higher than any financial investment you can make, at least in the beginning.

So before you invest in financial products, don't have any trouble investing in improving your human capital and increasing your future ability to generate income.

Once you've done that, is it time to start investing?

Not yet.

3. Protect yourself

Before moving on to the world of "pure" investments, I suggest you use your money in another way.

Get the right insurance. 

If you are following the first advice I gave you, you are working to grow your human capital and your ability to generate income. 

If something bad should happen to you (wood knocking), this capital would go up in smoke and you would have nothing left.

By protecting yourself against negative events such as accidents and very serious diseases, you will be sure that your human capital will be ensured at a very low price.

And, as the last thing before you start investing, remember to have a liquid "emergency fund" able to cover unplanned expenditures or possible drops in your income.

This fund is essential to avoid situations when you need the money and you have to sell your investments (or anything else).

But it's also true that if you're young, you might take a few more risks in this regard.

Let me explain better.

If your family is not dependent on you and they can help you with some unforeseen expenses, you may have a smaller emergency fund than would be appropriate.

This is not a solution that drives me crazy, as being independent is very important to me, but it can still be a possibility if you know you can get support from your family.

And now, finally, let's get into the more practical part of investing.

How to invest if you are young

Now that you made some investments to improve your human capital, you got insurance and saved some money for emergencies, you are ready to invest what you have left.

The first thing you need to do, very important, is to connect your investment to a goal you want to achieve over time.

It can be retirement, buying a car, a house, whatever you want.

Based on this goal and when you want to achieve it, you will need to select the financial products that are best suited to you.

During my workshops, I explained this process in detail, however, the complete program lasts 2 days, so it's definitely not possible to cram it into an article.

What I can tell you to give you a starting point is that the best products available to an investor who wants to invest in the long term, are well-diversified ETFs (you can find a document I prepared in my free group which explains what they are in detail).

Is it enough to invest in ETFs to become a successful investor? Absolutely not.

There are several other aspects to consider, such as choosing the right asset classes to build a robust portfolio that will perform well during all economic cycles.

However, compared to more traditional financial products (especially actively managed mutual funds, the ones people are trying to sell you in the bank), ETFs are more transparent, cost less, offer excellent opportunities to provide a higher return, and are faster to buy and sell.

Once you have chosen the products that are right for you, there is one last strategy that you need to know, and that allows you to invest even if you have little initial capital available.

Enter the Dollar Cost Averaging, or DCA for friends.

The DCA is an investing strategy that allows you to enter the financial markets a little at a time.

The main advantage of this strategy is to avoid being unlucky and entering at the wrong time.

Instead of entering all at once, you divide your capital into small parts over a predefined period of time.

Usually it is one or two years (could be more in special circumstances) and then you can start investing.

One of the most interesting aspects of DCA is that you can start investing even if you can save only 2-300 euros.

Today there are secure platforms that allow you to invest even these small amounts without worrying too much about costs.

Obviously, the returns you can expect from the first few years will not be stellar.

As you have seen above, even an incredible 20% on low figures would not make a difference in your life.

If you then take into account that the average return on the stock markets is around 7% per year, we are talking about even smaller numbers.

But starting to invest gradually (and from a young age) has two huge advantages.

What are the advantages of starting to invest gradually and at a young age

1. It helps you get used to volatility

When I started investing in the stock markets years ago, even just investing 1,000 euros made me nervous.

I knew I could afford to lose that money.

But at the same time, the idea of losing it (and being wrong) bothered me a lot.

I spent my days monitoring the performance of my stocks, almost compulsively.

Even if it was a small amount of money, when their value was going down I was upset.

It was similar to the discomfort I felt when I lost 20 euros on the street.

On the contrary, when there were good days, I was excited and euphoric.

This kind of reaction is common to many investors, especially beginners.

What is very important is to not pay too much attention to the volatility.

Instead, focus only on the things you can control.

Today I invest more money than I started out with, but it doesn't affect my emotions that much.

By now I am used to these fluctuations and I know that they are part of the game.

And this is only possible because years ago I started investing tiny amounts, gradually getting used to the volatility of the stock markets.

2. It allows you to make your capital work for much longer  

One of the most powerful forces in the investment world is compound interest.

A fancy expression which means having the money working for you.

In the example above with 20% returns, after the first year, you will have 20,000 euros.

In the second year, they will generate an "extra" return of 4,000 euros (20% of 20,000 euros).

These 4,000 euros is the result of compound interest.

How powerful is compound interest?

Here is an example that can show you.

Imagine you have two investors who are the same age.

Let's call them Warren and Gann, respectively, to honor the greatest investor of all time and a trader who was using astrology.

Warren, at the age of 25, decides to start investing in a well-diversified ETF that invests in stocks.

He decides to put in what he can, 100 euros per month and does that for 10 years.

After, he gets tired of adding money and decides not to add anything,

But he does leave invested what he has already invested, for the next 60 years.

At the same time Gann, who until then had tried to make money looking into the stars, decides to invest in the same product as Warren.

He invests 100 euros per month, as Warren, from the age of 35 to 60.

When they both become sixty, who has more money?

Drum roll and...

... the answer is Warren, who at 60 years of age will have 70 thousand euros, against 68 thousand of Gann.

(Operational note: for this simulation, I assumed an average return of 6% per year, slightly below the historical average)

This result seems incredible.

Not only did Warren invest less money in total and for a shorter amount of time.

At the end, he also earned more money 35 years later.

That is the power of compound interest.

And that is the main reason why it is so important to start investing as soon as possible.

Starting to invest when you're young gives you a chance to make a few mistakes along the way. 

Investing as soon as possible gives you the chance to be lazy tomorrow, if that is your wish.

The longer you wait to put your money to work (even a small part), the more you will have to work to achieve your financial goals.

And often you may be forced to make unpleasant choices, which you could have avoided with a good investment strategy.

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