For younger investors, however, one thing approaches the proverbial house bill sandwich, says Gargi Chaudhuri, chief investment and portfolio strategist, Americas, at BlackRock.
“It’s never too early to start investing. You’re never too young,” she says. “Every single year you miss can be potentially quite expensive from a compounding perspective. There aren’t many free lunches, but bundling is certainly one of them.”
Chaudhuri gets it if you’re young and not yet thinking about retirement. After all, it’s a big, amorphous thing that’s decades away.
“When I was 20 years old, retirement was the furthest thing from me,” she says. “Even though I was in the financial industry, I couldn’t imagine the fact that one day I would retire.”
If you’re at the beginning of your investment journey, you don’t need to think about the ins and outs of life after you’ve worked. Rather, focus on one powerful factor you can control: market timing.
“Even if they’re very, very far away, I would encourage young investors to start thinking about their journey today because of the compounding that’s going to happen,” Chaudhuri says. “Even if you leave the money [out of the market] in five or 10 years you’ve missed out on so much of the compounding effect by sitting in cash.”
Compound interest is the mathematical power that helps you multiply money at an accelerated rate. A 10% return on a $100 investment earns you $10. Earn another 10% on your $110 and you’ve earned $11. Keep this up throughout your investing career and you’ll see how starting early can turn small numbers into big numbers.
If a 20-year-old invests $5,000 a year in a retirement account that earns a 7% annual return, by the time he turns 67, the portfolio will be worth more than $1.7 million. If it starts five years later, the total drops to $1.2 million. If she waits a decade to invest, she ends up with about $858,000.
Getting started early is one thing, but many investors freeze up when it comes time to pick investments.
Like many market experts, Chaudhuri recommends building a core portfolio of low-cost, diversified mutual funds and exchange-traded funds. Spreading your bets across a wide variety of assets smooths your performance over time and helps mitigate the risk that a downside in any one investment could derail your performance.
Funds that track a broad US stock market index, such as the S&P 500, are a good place to start. These mutual funds and ETFs give you exposure to hundreds of stocks, and since they’re inexpensive to manage, they come with super low fees.
But if you own a broad stock market fund, consider using some of your portfolio to diversify it a bit, Chaudhuri says.
“It’s really important to have a diverse view of the markets and to think about some of the themes that are going to drive the markets over the next 20, 30, 40 years,” she says. “Of course the US markets are important, but I would tell someone earlier in their investment journey to think about the big changes happening in the world right now and how that might shape investment performance over the long term.”
Different people think differently about this, and if this doesn’t sound like a lot of depth to you, it might make sense to consult with a certified financial planner.
For the Chaudhuri, however, this means some exposure to developed and emerging markets overseas, even though they have recently lagged behind their US peers. She points to demographic changes in places like India and Mexico, where younger populations are likely to be “big drivers of global growth over the next five, 10, 15 years.”
She is also bullish on Japanese stocks, which appear to be waking up and attracting new generations of investors after years of economic stagnation.
Of course, these are just examples, but Chaudhuri’s message is clear: As you diversify your portfolio across markets, think about where the world is going, not where it has been.
“You have to think about how the world is going to change in the next 50 years that you’re investing for,” she says.
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