Two Valuable Lessons for Young Investors
I was recently asked to put some thoughts together for investing newsletter Cuffelinks on what advice I would give my 20 year-old self.
Thinking about this reminded me that becoming a better investor is an iterative process that occurs over many years. The only way we can improve as investors is if we learn new things as we go, likely making valuable (and potentially costly) mistakes along the way which help us accumulate greater knowledge and form better financial habits.
Unfortunately there are no do-overs when it comes to investing, and so it is with that in mind that I think about two pieces of enduring investment advice I would give my younger self.
Don’t overrate your abilities
The first thing that comes to mind when I think about my 20 year-old self is overconfidence – specifically overconfidence in my ability to beat the market. My early personal investments were concentrated in a handful of stocks, which all ended up being poor performers relative to the broad market. One of those, a US airline, even went bankrupt soon after, which was a big wake-up call.
After twenty years’ experience in investment management, I would tell my younger self how challenging it is, even for professional investors, to consistently beat the market. I certainly became a better investor once I grasped the awesome power of diversification.
Contribute early and often to make the most of compounding
Compounding really is the most powerful savings tool at our disposal. When I log into my Vanguard 401(k) portal in the US, I can see that over 20 years of saving, about half of my savings balance is from investment returns. The other half is made up of my contributions over the years.
While I have been able to contribute more over the last 10 years than the decade before that, it is those early dollars I was able to save in my 20s that have had the most impact on returns through compounding over time.
Although retirement seemed a long way off back then – and it still does today – I would be in a far better position today if I had made fewer silly purchases and put just a little extra down when I was younger.
I also would have told my 20 year-old self not to buy that Honda Prelude. This compact sports car was uncomfortable to drive on my long commute to work and the mileage wasn’t great. I should have bought the Civic, which was significantly cheaper and more practical, and then tipped the money I would have saved into my Vanguard retirement account.
Originally posted on 16th May 2017 at https://www.vanguardinvestments.com.au authored by By Rodney Comegys, Vanguard Head of Investments, Asia-Pacific