It’s difficult being a young adult. While you have lots of energy, huge ambition and a very open mind regarding new ideas, a lack of experience and knowledge can hold you back. That’s especially the case in the financial world where, it seems, the best way to develop and improve is to make mistakes and learn from them.
However, it would be a lot easier (and far less painful) if those experiences were already known and understood at a relatively young age. For example, knowing that buying assets which appreciate, such as shares and property, as opposed to assets that depreciate, such as cars, would be a pretty good start. The reason for that is obvious, since investing as a young adult in high quality assets that are likely to increase in value over time is a far quicker way to achieve life goals such as paying off a mortgage, retiring early and enjoying a comfortable lifestyle.
Furthermore, the effect of compounding is often not fully grasped at the age of 21. That may be because at that age there has not been a significant amount of time through which returns have been able to compound but, over a decade or two, obtaining a 7% total return, for example, on shares can turn a decent sum into a small fortune. In fact, £10,000 invested for 20 years obtaining 7% per annum in total returns would become £38,697. However, the appeal of slow and steady compounded returns is often missed as a young adult in favour of more current consumption.
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In addition, dividends make a huge difference to returns over a long period. Often, younger investors do not even have dividends on their radar and instead prefer to focus on capital gains via higher risk companies. This may be more exciting and get the heart racing, but in the long run solid, reliable, high-yield stocks tend to offer a more appealing risk/return profile. Therefore, as a young adult, buying 4%+ yielding FTSE 100 stocks for the long term is likely to turn out well.
Of course, a temptation in your early twenties is to invest or spend every last penny you have, leaving no emergency cash pile. This is never a wise move and it is only when a boiler needs fixing, a car tyre is punctured, or some other necessary expense occurs that this vital lesson is learned. Certainly, interest on cash is poor and often does not cover inflation, but tucking away a few quid just in case of emergency is a smart move.
Similarly, putting all of your eggs in one basket may be tempting, but comes with too much risk. This can be in terms of the shares you buy, or even the assets you hold. For example, it is tempting to buy the biggest and most expensive house possible and to have no other investments. While this may make sense in the short run, since it means living in a better home, retirement comes a lot quicker than expected and it is a very good idea to have a healthy mix of assets so that there is a balance between living for today and also planning for the future.
