The label “investor” has a whole host of connotations. It may bring to mind an image of a gray-haired businessman in a pinstriped suit, a tech bro in a logo t-shirt, or that trendsetting friend who is always finding the next big thing. The modern investor can be anyone.

Technology has played a vital role in the spread of investing, and it has certainly made it a more accessible endeavor for investors of any age, stage, and bank account balance. It has helped reframe how we invest, and how we think about investing. This is particularly true for younger investors, who, thanks to the events happening in the world today, are realizing its importance in building long-term wealth and stability.

But there’s another side to it.

Keeping in context all that’s been transpiring globally, recent market volatility has discouraged many younger investors who haven’t completely bought in yet.

So, when to start investing? The answer is now! Despite extreme market fluctuations, experts maintain that there is no better time than the present to start investing. Whether we’re facing an economic downtown, allocating some of your hard-won earnings to investing will set you up for long-term success.

Looking at Gen Z in particular, a large percentage appear to be taking advantage of the benefits of investing early. According to a survey by Investopedia, 54 percent of Gen Z already have some kind of investment: ranging from mutual and exchange-traded funds (ETFs) to cryptocurrencies and non-fungible tokens (NFTs). The fact that over half are investing is promising because youth shouldn't be a barrier to entry. Rather, it’s a power position.

But there’s a discrepancy in the number of Gen Zs who are investing compared to those who are confident in their investing knowledge, the latter of which dips to 46 percent. This is lower than baby boomers, Gen X, and millennials, which may not come as a surprise given the age of those previous generations and the experience that comes with it. It may also be because the sources of information available to us have drastically increased, and it can be hard to know whom to trust – or even whether you can trust the concept of investing and whether it pays off in the long-term.

 

Confidence in personal financial knowledge by age group
Source: Investopedia

For that half of Gen Z that is not investing, it may seem easier to ignore all the noise and put off investing until their financial situation becomes more stable. We saw this with millennials back in the 2010s, and historically they’ve been the generation to struggle the most financially.

The notion of putting off investing until finances increase is not a helpful one – and is actually harmful to your future financial self.

Gen Z has the prime opportunity to avoid the investing mistakes of millennials and instead set themselves up for years of prosperity from now. Investing as a young adult is a prime opportunity, even with college debt and lower salaries. There are tenfold reasons, but we will explore some of the key ones below.

Advantages of Investing in Your 20s

1) Time is on your side

The primary advantage of investing in your 20s is the magic of compounding interest. This occurs when you reinvest earnings, and they work with your initial investment, so you see returns on continually larger amounts. This strategy requires time and reinvestment – that’s it. You don’t have to worry about allocating larger amounts to your investments in your middle age, making it a simple but elegant solution.

Not everyone takes advantage of compounding by putting away money early. To give you an idea of what this looks like, a single CHF 10’000 investment at age 20 would grow to above CHF 890’000 by the time you are 60 years old (based on a 11.88% S&P 500 average annualized return since adopting 500 stocks into the index in 1957 through December 31, 2021). That same investment at age 30 would only yield nearly CHF 300’000 by age 60. At 40, it would yield CHF 94’000.

 

The concept is simple: The longer the time horizon you give your money to work, the more wealth it can generate. This is the beauty of compounding.

2) More recovery time

Imagine you are driving a car. If you see a curve in the road from 400 meters off, you have plenty of time to slow down and control the angle of your turn. But if you were to round the corner, you’re left with only 10 meters to try to make another turn, but in the opposite direction – it’s a lot more difficult. Investing is the same, in the sense that if you start in your 20s, you have time to course-correct over the tenure of your investments, whereas the older you get, the harder it is to recover from your mistakes.

Bear in mind that there’s always going to be a learning curve to some extent, whether you’re starting to invest in your 20s or 40s, but the opportunity to make mistakes at a young age gives you more time to get back on track. So, learn lessons early. A costly portfolio mistake at age 50 could seriously set you back on your retirement journey, or whatever your financial goal might be. If you invest young, you will have time to recover your losses, and you will have learned some valuable lessons along the way.

3) Longer timelines allow for more risk

This point goes hand-in-hand with the previous one. We touched on how young investors can recover from their mistakes, but they also have an advantage in that they can take risks which might lead to big payoffs later down the track.

Your time horizon is the expected timeframe you have left before you plan to withdraw all or part of your investment money. Thus, if you’re 20 and hope to retire by 60, your time horizon is 40 years.

A longer time horizon affords you more risk because you won’t need to tap into the money for decades to come, according to the Securities and Exchange Commission (SEC). The 2008 recession is a good example of this. The Standard & Poor’s 500 (S&P 500) index fund fell 57 percent from its 2007 peak (1576.09) to its lowest point in March 2009 (666.79). It steadily rose but did not reach pre-recession levels until April 2013. The stock market can take years to recover. While the 2008 recession caused many people to postpone their retirements, younger investors were less affected because of their longer time horizons.

For some investors, it may be tempting to use the cash flow generated from their investing activities for other ventures, like entrepreneurship or purchasing rental properties. This shortens the time horizon but can be strategic because it provides for further diversification of your overall investment portfolio. Before doing so, it is important to forecast and weigh any payoff from these ventures against the long time horizon for investing and what compounding can do for you on its own. However, in most cases, there is no reason to use the cash flow from investing activities and disrupt your long-term investment plan.

4) Tech-savvy

Younger generations have an aptitude for technology because they’ve grown up in a fast-paced world where new ways of doing things aren’t just accepted, they’re expected. As a result, their risk tolerance, when it comes to new frontiers like crypto investing, impact investing, or smart investing, is higher than that of prior generations.

Technology is leveling the playing field and making investing more accessible than ever, with investors in their 20s taking advantage of this. The proliferation of new online trading platforms provides countless opportunities for investors to enter the game, and most of these have their own communities and resources to further spread and increase new investors’ knowledge. Before online resources became so readily available, you may have picked up one of those classic "Investing for Dummies" books, but nowadays, you can access a vast number of diverse sources of information to assist you at every stage of your investment journey.

Mistakes young investors tend to make

We discussed how the margin of error can be much larger for young investors because the time horizon is longer. But just because there’s more leniency or opportunity for correction, doesn’t mean young investors should let their guard down. They can still make very costly missteps which can have severe consequences. We’ve outlined some of the most common mistakes young investors make below.

1. Taking financial advice from social media

This may seem paradoxical given the tech-savvy advantage young investors have. However, looking specifically at social media, there are countless self-proclaimed “experts” out there giving poor financial advice, whether it’s influencers on TikTok or anonymous commenters on obscure Reddit forums. For some of these uncredentialed “finance gurus,” their motivation is increasing their followers or engagement, rather than actually helping those who are consuming their content. It’s important to make sure you vet the content you consume and only seek out guidance from genuine advisors.

Vetting becomes quite the arduous task in addition to staying wary of popular trends, which are subject to groupthink and oftentimes are no more than a bandwagon for the next shiny new thing. The irony is that gold investing isn’t as popular as NFTs, yet what’s shinier than gold? Turns out, people are in fact looking to “combine” physical gold with NFTs to bring more inherent value to these tokens. Conventional wisdom may sometimes look dusty and boring in comparison to more exciting new developments, but there’s a reason certain strategies and investments have stood the test of time.

Gen Z should keep their guard up more than any other generation before them because they spend about 6.5 hours on their smartphone per day. But their screentime isn’t just for the sake of entertainment—many of them use social media or other apps as learning tools — how and when to start investing, and what all the terms and options mean.

A survey by Investopedia shows that Gen Z is the most video-forward generation in history, with YouTube being the most popular source at 45%, followed by conversations with friends and family (44%), internet searches (39%), TikTok (30%), and financial information websites (29%).

 

Most popular information sources by age group
Source: Investopedia

The same study shows that almost a quarter of Gen Z-ers are investing in crypto and stocks, and about 10 percent own NFTs.

 

Most popular investments by age group
Source: Investopedia

While technology can be a force for good and push the boundaries to pioneer new frontiers in the world of finance, there is a fine line between investing and simply speculating. Crypto investing and NFTs may fall into the latter category, as they are unproven in the long-term.

Everyone has that friend who swears by their crypto investments, but the reality is that the global crypto market has dropped below USD 1 trillion, having rapidly sunk from its peak of USD 3.2 trillion in the fall of 2021. Bitcoin, the largest and probably most well-known cryptocurrency, has itself fallen 70 percent during the same timeframe. That massive drop has wiped out years' worth of gains in mere months and is testing the faith of even the most fervent believers in digital assets.

All of this is not to say that more volatile (and flashier) types of investment like crypto investing or options are not legitimate — far from it. These new frontiers are necessary to push the boundaries of what’s possible. What Gen Z may lack in earning power from a salary compared to other generations, they could vastly make up for it with their bandwidth for risk tolerance, owing to their longer time horizons for investing.

But to achieve long-term stability and wealth, these types of high-risk investments need to be balanced with time-tested “safer” methodologies. Thus, while social media may be flecked with nuggets of wisdom, investors in their 20s (or any age, for that matter) should look at it with a critical eye.

2. Investing without due diligence

Opportunities that are too good to be true most likely are. It’s important to understand that every form of investing involves risk, so statements like “zero risk” or absurdly high guarantees as to future returns are red flags.

The most effective way to avoid being duped or making a poor investment decision is by doing your research. Not only is it essential to research the asset you are considering investing in, but you should make sure the platform you’re using is credible. Cross-referencing of reviews and features can help, but also a look out for subtle red flags that pop up in the language being used to market these products. Extremely high returns or inflated metrics may be a good indicator for suspicion. The best way to know what’s real and working and what isn’t is by taking the time to understand the platform or asset.

3. Underestimating diversification

A concept that rivals, if not surpasses, compounding in its importance is diversification. The idea is simple: Invest in a range of different ways to lower your risk. For instance, if the stock market is reeling in the wake of an economic downturn, bonds may remain relatively stable, so if you allocate your portfolio to 60% stocks and 40% private equity, you are exposed to a much lower level of risk than if you had allocated 100% of your portfolio to stocks.

That’s one example, but there are several ways to diversify, whether by investing in diverse markets, asset class, strategies, investment types, risk, etc. It goes back to the old adage of not putting all your eggs in one basket.

On average, well-diversified portfolios generate higher returns in the long-term. It’s a tried and tested methodology that any young investors should apply to their strategy, so don’t underestimate it.

4. Not investing at all

The worst mistake a young person can make is not investing at all. As mentioned above, young investors have the distinct advantage of time on their side. Time is an irretrievable resource. Rather than spending money casually now, seize the opportunity presented by long time horizons and compounding.

We can’t overstate the importance of investing early. Younger people tend to feel stretched thin financially with student loans, lower-paying jobs, and starting families. It can seem a difficult task to allocate a percentage of earnings to an investment portfolio, but making this into a consistent habit will send them on a path to future wealth, even if it requires a sacrifice in the present.

Now that we’ve looked at some of the benefits of investing young and mistakes to avoid, what types of investing should you consider?

Where and how to invest when you’re young

Taking into context age—investing in your 20s—some of the best investments to consider are human capital, private equity, and real estate. We’ll dive into the reasons why below:

Human capital

You can think of human capital as “the present value of all future wages”. Investors in their 20s have such an opportunity to further themselves by learning new skills or advancing their education. There are so many options online, like certifications or degrees, that can increase a young person’s future earning potential. If you’re a young person, invest in yourself! Prioritizing your education now will yield high returns in the future when you’re negotiating a raise or trying to land a new job.

Private equity

This one might come as a bit of a surprise, but private equity is a great option for investing in your 20s. The complication, however, is that direct investment in private equity poses a high barrier to entry. Most won’t be able to meet the minimum requirements (especially when you are young). But there are opportunities for private equity exposure which can be extremely advantageous for up-and-coming investors.

Here are key reasons to seek out private equity options:

  1. The majority of growth happens at the pre-IPO stage. More than 40 percent of investors earn all (or nearly all) of the value created before the IPO, leaving public investors with either no gains, or even losses, according to Entrepreneur.
  2. They offer a better risk/return ratio because of the longer time horizons. If you’re taking larger risks for higher returns, it’s best to do it at an early age.
  3. Private equity investments generally have lower volatility compared to public market investments. This is due to a couple of factors. Firstly, their illiquid nature insulates them from panic selling during downturns, and secondly, they have a lower correlation to public markets. The result is that you won’t experience extreme losses driven by psychological factors.
  4. As a private equity investor, you can access industries and ventures that aren’t publicly available, including unicorns (companies valued at about CHF 1 billion or more).

Real estate

1. Competitive risk-adjusted returns

Real estate returns vary. Factors like location, your real estate type (REITs, direct owning, etc.), and management all influence results. Regardless, many investors use the average returns of the S&P 500—“the market”—as a benchmark. According to our calculations, Swiss real estate outperformed the Swiss stock market by 85.65% over the last 20 years.

2. Inflation hedge

Real estate can hedge against inflation. This stems from the positive relationship between GDP growth and the demand for real estate. It’s back-to-basics economics: Economies expand, driving up rent, which translates into higher capital values.

3. Portfolio diversification

Investing in real estate also has diversification potential. Investors can lower the overall risk and volatility of their portfolio by adding in real estate, considering the fact that real estate has a low correlation with other major asset classes such as stocks (0.2936) and bonds (0.2825). Moreover, real estate investing can also provide a higher return per unit of risk.

In conjunction with human capital, private equity, and real estate, there are a plethora of new-wave tools democratizing access to alternative investments by creatively decreasing or segmenting the minimum investment. It’s becoming easier than ever to start investing in exceptional projects from a younger age.

In many ways, Gen Z is more sophisticated than the generations that came before them when it comes to investing. This new wave of investors is the force driving constant change and innovation, not least in the area of alternative investments.

Conclusion

Investing when you’re young brings a multitude of advantages: A long-time horizon, higher risk tolerances, and compounding all tip the scale for investors in their 20s. But this doesn’t mean you should throw caution to the wind and leap into investing without the right strategy. Every investment carries some level of risk. Higher-risk investments may have greater potential for high returns, but they also come with an increased chance of losing your money entirely.

Diversifying your portfolio is the best way to defend against this risk. If you take on higher-risk investments, such as Bitcoin or the latest meme stock, you are at greater risk of suffering losses than if you were to build the majority of your portfolio based on tried-and-true, long-term investments that have historically performed well.

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