How should young investors approach the current financial market?
Younger people should embrace the volatility rather than fear it as their money has longer to grow
One of the biggest misconceptions about investing is that it is something only older people do.
The young have other priorities, such as paying off student debt or building a property deposit, and can leave investing until later in life.
This misconception is not just wrong, it can be costly. The truth is that the best time to invest is when you are young, because that gives your money so much longer to grow in value.
Those in their 20s or 30s who plan to delay investing until the current stock market volatility calms are making a mistake, say experts. They have the least to fear from today's ups and downs.
Even if you only have a few thousand dirhams to spare, it is a great learning experience, and you could create a habit that will last a lifetime.
Demos Kyprianou, SimplyFI.org
Ben Barber, a UAE financial blogger at www.buildingwealthwisely.com, says young people can feel invincible: “You look great, feel healthy and want to have fun. You aren't even thinking about retirement, which is decades away.”
Yet the irony is, this is the best time of life to invest. “With every passing year, the companies you invest in will pay out dividends and grow their businesses. If you wait, you are missing out,” he says.
Young people's money could have 40 or 50 years to grow in value, and today's uncertainties will be long forgotten by then.
Lyle Gates, 32, from Canada, says expatriate life offers many financial benefits, but a company pension plan is not one of them. “I therefore need to take responsibility for my own future to enjoy retirement later in life,” he says.
Mr Gates, who has lived in the UAE for four years and works as a construction engineer, says his father always encouraged him to invest. His words of wisdom, "if you're not investing, you're losing”, still drive him today.
Mr Gates was reluctant to pay financial adviser fees to be sold expensive actively managed funds. Instead, he turned to the UAE's first robo-adviser Sarwa, which offers clients balanced portfolios of exchange traded funds (ETFs) that passively track a range of indices. “Sarwa’s low fees and simple approach was exactly what I wanted, as it can be daunting to create your own portfolio," he says.
He now has a spread of trackers following the US S&P 500, London's FTSE 100, emerging markets and bonds.
Sometimes that takes strong nerves, he admits. “Spending more time in isolation means more time reading news and watching YouTube videos calling another a market crash every other day, but I'm sticking with the plan,” he says
Young investors can turn volatility in their favour, especially if they make regular monthly contributions. That way they actually pick up more stocks for the same money if the market falls, and benefit when the recovery comes.
Sarwa chief executive Mark Chahwan says the message is getting through, as his site has seen increased interest from younger investors, with new client numbers up threefold in March, despite the crash, or because of it.
Many are investing for the first time. "The lockdown reminded many that they needed to get their finances order, and plan for the future," says Mr Chahwan.
Online investing has come into its own during the lockdown, as many traditional banks and financial advisory firms reduce hours or close branches.
For young people, now is an ideal entry point, Mr Chahwan says: “Market volatility allows them to buy stocks at sale prices. If they stay invested, they can win big when shares recover.”
He claims that young professionals are particularly attracted to the low-cost, robo-investment model. “Our average client age is 34, of whom 60 per cent are first-time investors,” he says.
A few years of investing today could be equivalent to several decades towards the end of your career, Mr Barber says.
That may sound unlikely, but the figures back it up. If you invest $10,000 at age 25 and it grows by 6 per cent a year after charges, you will have $102,857 by age 65. But if you invest $10,000 at 55, it will be worth just $17,908 by 65, assuming the same growth. That is a fifth of the total.
So how much should you invest? Ideally, as much as you can afford, Mr Barber says. “If you are new to investing, start with 10 per cent of your salary. You will quickly get used to living on the rest.”
Then, steadily increase that over time. “If you could invest 30 per cent of salary at age 30, you will accumulate wealth quickly, and still enjoy life along the way," he says.
Mr Chahwan says no investor can consistently time the market, so do not lose out by waiting for the perfect time to invest.
Those who held off at the end of March have regretted it, he adds: "History shows that recoveries usually occur in quick bursts that are unpredictable and almost impossible to time and you will lose out by being out of the market.”
Mr Barber favours spreading risk by investing in ETFs rather than individual stocks. "History shows that trying to pick stocks and actively outperform is almost impossible.”
Demos Kyprianou, board member of SimplyFI, a non-profit community of personal finance and investing enthusiasts who favour passive investing, says even students should take the plunge. “Even if you only have a few thousand dirhams to spare, it is a great learning experience, and you could create a habit that will last a lifetime,” he says.
Too many think investing is complicated, but Mr Kyprianou says you can learn the basics of building an ETF portfolio quickly. "After that, four hours a year is all you need, to check you are on course,” he says.
Mr Kyprianou says young people will have to strike a balance between paying off debts and building investments. “Student debt is cheap, if you are paying 5 per cent or less, there is no rush to clear it. Just keep whittling it down,” he says.
Avoid the temptation to splurge on credit cards, he adds: "I'd rather my money went into the market every month rather than paying off card interest.”
As passive funds, ETFs have to follow the market down as well as up but it should still beat active management over the longer run. "Active funds do not consistently beat the market, yet charge between 1.5 and 4 per cent a year. With an ETF, you pay between 0.2 per cent and 0.5 per cent,” My Kyprianou.
That may sound a minor difference, but it adds up over the years. If you invest $100,000 and your annual costs total 2.5 per cent, you will have $395,926 after 40 years, assuming annual growth of 6 per cent.
If your charges total 0.5 per cent you will have $851,331. That tiny charging difference has swallowed hundreds of thousands of dollars, shrinking your retirement pot by more than half.
Some young investors will want to inject a bit of excitement with a few risky investments, but Mr Kyprianou says gamblers should keep it in limits: “Make it a strict rule to never risk more than 10 per cent of your overall portfolio.”
Stuart Ritchie, director of wealth advice at AES International, says young investors have the edge because they can afford to take more risk on shares, which are more volatile in the short term but should outperform bonds over the longer run.
He says even those buying passive ETFs should consider speaking to a chartered financial planner to work out the right asset allocation for them.
Online portfolios typically offer a choice of cautious, balanced or aggressive portfolios. “Many investors see themselves as balanced whereas for younger investors in particular, a more aggressive portfolio may be more appropriate,” says Mr Ritchie.
“There is no better time to start investing than today. Aside from yesterday.”
Updated: May 19, 2020 11:53 AM