What if you were building wealth from scratch in 2020?
Published 17-AUG-2020 12:39 P.M.
7 minute read
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The times they are a changin’. Our need to build wealth is not — but the way we do it is. Here’s some ideas on how (and why) to begin investing in 2020.
Maybe you’re 19-years-old and have yet to pop your investing cherry.
Maybe you’re 29-years-old and the penny has finally dropped that grinding out a 9-5 job for the next 30 years will bring you more misery than financial security.
Maybe you’re 39-years-old and you need to recover having just lost a substantial chunk of capital in the markets.
Whatever the scenario, we’re going to take a look at the investing and personal finance landscape as it stands in mid 2020 and explore a couple of approaches for building wealth from at, or near, zero.
There are some aspects to investing that haven’t changed in hundreds of years.
But there are other parts of the wealth building process that are changing faster than ever before.
If you’re starting out building wealth in the financial markets today, you face a significantly different set of challenges and opportunities than you would have 50, 20 or even just five years ago.
In 2010 index funds were all the rage.
Today, just 10 years on, cryptocurrencies, private equity, micro investing and fintech are driving innovation and disruption to the point where, to many, index funds seem boring.
Starting from scratch today is a different beast on that basis alone — leaving the major economic fallout from COVID-19 aside.
So let’s start with the basics.
The best time to begin is always now
Whenever you begin investing, and at whatever age, your most powerful ally (or adversary) is time. Anything you do in life requires time. In investing, how you spend your time is particularly important.
You’ve probably heard the statement that time in the market is more powerful than timing the market. This refers to the generally accepted idea that on a long enough timeline, stock prices go up.
In a two year period, the market might fall 50%. But over a 20 year period, the market will probably rise 150% to 200%.
If you’re wondering whether to begin your investing journey now, the answer is yes based on that idea.
Check out this example from The Street to see why.
Take two 25-year-olds. The first commits to investing $5,000 a year for 11 years. Total starting capital: $55,000.
The second waits until they are 35 to begin investing $5,000 a year and keeps doing so until age 60.
Let’s assume an annualised rate of return of 8% on their invested wealth.
The one who started at 25 invests $55,000.
The other invests $130,000.
Looking at that, you’d assume the second investor would gain the most, having invested more than double what the first did, right?
Well, check this out.
At 8% a year, the first investor has grown their portfolio to $615,000.
It’s taken 35 years to generate $560,000 in profits (forgetting brokerage fees and taxation for the purposes of this example).
The second investor, on the other hand, who started 10 years later but invested over 26 years instead of 11, has grown their portfolio to $430,000 from a total investment of $130,000.
Despite investing more money, they’ve made just $300,000 in profit — more than a quarter of a million dollars less than the one who started at age 25.
That, in a nutshell, is the supreme power of time in building wealth.
That’s why we say there’s no better time to start than now (providing your personal financial situation allows it, of course — this is not personalised financial advice!).
The way that time works for you when you start right away is that your returns compound.
If you leave your money and the returns it generates in the market, then you start making returns on top of those returns.
The more time you allow for this process — which Einstein called the eighth wonder of the world — the more you can benefit from it.
And on the topic of time...
Starting early allows you to be more aggressive in your investing
If you are in your early 20s, for instance, you have about 33% more time — in theory — before the notional retirement age of 60 to go about building wealth.
That’s 33% more time you can use to experiment, learn and refine your investing style.
It’s also extra time you can use to recover from any losses you might incur from investing in higher risk assets — like small caps, speculative tech stocks, cryptos and options.
Higher-than-average risk assets can sometimes bring higher-than-average returns.
If you get up and running early in life, you might find you can make some big returns by tolerating the higher risk.
But even if you’re only getting started in your 30s, you might want to allocate a small amount of capital to trying to win big in cryptos or options.
Generally, though, you probably won’t want to take on as much risk, as you’ll have less time — in theory — to recover from any losses your capital suffers.
Whenever you’re starting though, you should:
1. Cultivate financial literacy and discipline
The saying ‘knowledge is power’ is a cliché. But it is so for a reason. Because in many senses, it’s true.
In investing, it is especially true.
In order to take $10,000, or $50,000, or $150,000 and multiply it 10 or 20 or 50 times through investing, you’re going to need to obtain and interpret a lot of knowledge.
Knowledge about the markets, the world, financial technology, business — basically everything.
Becoming financially literate will elevate your knowledge about the world and consequently your ability to navigate your wealth through the markets.
It’s a constant process. Read widely, expose yourself to different ideas about making money the constantly changing landscapes of both personal finance and the wider financial world.
2. Keep an open mind and let data guide you
Beginning your investing journey in 2020 is in some ways no different from if you were beginning in the 1980s.
But in other ways, it’s markedly different.
Today, you have access to more information than ever before.
If you have an internet connection, you have the ability to find out almost anything you like about a market, stock, anything, really.
You also have access to assets that didn’t exist even 15 years ago — cryptocurrencies — and ways of getting into the market that are only possible because of technology.
Micro investing is a prime example of that.
The apps and platforms that allow you to invest pocket change into funds and stocks take advantage of many strands of modern connectivity and financial technology to make investing more accessible and easy to understand.
You may have heard this trend called the ‘democratisation of investing’.
This trend is the latest evolution in the history of wealth building.
Combined with the sheer amount of information available, the current state of the investing world means you have more power and knowledge than ever with which to begin your own wealth building journey.
The bottom line is, if you’re starting that journey in 2020, you should take advantage of the centuries of knowledge and research available to you — and the latest technology to help you implement that knowledge in your own investing.
To sum up then, if you’re just starting your wealth building journey...
Start as soon as possible and take advantage of every tool and piece of knowledge you can.
Navarre is the Founder of Navexa— a portfolio analytics service made for Australian investors. Navarre left a lucrative corporate developer job to combine two of his passions; investing and entrepreneurship. He created Navexa because he couldn’t find a portfolio analytics service that met his own high standards. Now, he’s focused on helping as many Australians as possible get more from their portfolios through the smart and creative use of data. Follow Navarre on Twitter and connect with him on LinkedIn.
This article was originally published on https://www.navexa.com.au/blog/what-if-you-were-building-wealth-from-scratch-in-2020
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