5 Things To Know As A Young And Long-Term Investor
Long-Term Horizon, Portfolio Strategy, Growth, Tech
Seeking Alpha Analyst Since 2021
I am a long-term investor focused on macro trends that are shaping the future of our world in the next decade. Within those macro trends, I carefully place micro bets keeping in mind patience and discipline required to fully tell the story of growing businesses.
https://twitter.com/BullofSt
Disclosure:
All contributions to Seeking Alpha are my opinion and should not be taken as investment advice. Please do your own due diligence prior to making any investment decisions.
Summary
- Time is your biggest asset.
- Understand the power of compound interest.
- Identify your investment strategy.
- Understand the benefits of savings.
- Practice patience and discipline.
If you have started your investing journey as a young adult, you are already ahead of the curve. Most people either do not invest or do not start early enough to see their investments compound over time. There are many important things to know as a young investor but below are the 5 most important that i’ve learned so far:
1. Time is your biggest asset
As a young investor, time is on your side. Despite all the recessions over time, the U.S stock market has only gone up. But, it did so over a long period of time. Instead of trying to time the market, your goal as a young and long-term investor should be to stay in the market as long as possible. Below is a chart of the S&P 500 to illustrate why time in the market beats timing the market. If you had sold your positions during any of the drawdowns, you’d likely miss out on incredible gains.
2. Understand the power of compound interest
Albert Einstein is reputed to have said: “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
To me, this could not be more true and ever more relevant today. To illustrate, let’s say the average 25 year old makes $50,000 per year. This person would only need to save and invest 10% annually ($5,000) to have a staggering $2,434,259.06 by age 65 (close to retirement age) assuming a 10% return (around historical average S&P 500 return). The actual results could be much greater as the 10% return is conservative and the calculation assumes this person never gets a raise! However, let's say you want to retire at 55, who doesn’t? With that in mind and the same variables, your investment would reduce by $1,529,541.94 to $904,717.12. The power of compounding lies in how long you hold your investments and as discussed, as a young and long-term investor, time is on your side.
Below are two links, one to model out investment returns and one to learn more about compound interest.
3. Identify your investment strategy
Having an investment strategy is critical to long-term success in the market. Before you start investing, ask yourself:
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What are my goals with investing?
This could be as simple as wanting to have enough money to retire by a certain age or investing to buy a home. Knowing what your goals are will help keep you on track with investing in the good times and more importantly the bad times.
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What is my risk tolerance?
Are you a conservative and risk-averse investor or are you okay with taking high risk? Risk is fundamentally a tradeoff, the higher the risk, the greater probability of higher return and lower the risk, the greater probability of smaller return. Risk tolerance can differ person to person depending on their goals. If you’re more risk-averse, you might be better off investing in an index fund or ETF. If your risk tolerance is high, you might be better off investing in individual stocks and implementing other strategies (options, futures, etc).
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What is my time horizon?
Are you investing for the next 5 or 10 years or even longer or do you expect to stay in the market for a shorter time period? Your time horizon can dictate your strategy and your returns.
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What will I do if there’s a recession and my portfolio drops along with the market?
If the market drops significantly and so does your portfolio, will you hold, trim, sell, hedge, etc? These are all things to consider before a significant drop occurs so you are prepared and thinking rationally instead of emotionally.
Knowing the answer to these questions and others will help you stay on course because you have clearly identified a path moving forward.
My personal investment strategy could simply be described as: invest in high growth businesses for a long period of time across multiple sectors and categories that are shaping the trends of the next decade, keeping in mind simple portfolio strategies like asset allocation, position sizing, and dollar cost averaging. As an example, some of the current positions I hold are: Square (SQ), Etsy (ETSY), Crowdstrike (CRWD), Roku (ROKU), and Teladoc Health (TDOC) because I would argue they are/will shape the future of the next decade. I have a high risk tolerance and fortunately time is on my side allowing me to stomach the volatility that comes with high growth stocks. When significant drops do occur (commonly with growth stocks) and the thesis of the investment does not change, I don't panic because I have conviction in my strategy.
4. Understand the benefits of savings
As a young investor, understanding the benefits of savings will help you compound your investment returns over a longer period. To illustrate, see the graph below. If you were to invest $10,000 per year for 30 years, assuming 7% returns and not taking into account any investment fees, It is not until year 20 that your investment return is higher than your cumulative savings. For the first ~20 years, what matters more is that you consistently save. After that, the power of compounding takes effect and you start to see significant returns on your savings.
It’s important to note that seeking a higher return (greater than 7% indicated in the chart above) will benefit you more over the longer term than saving more due to the power of compounding. However, the higher the return, the higher the risk so the ideal investor should save aggressively and seek a return in line with their risk tolerance.
5. Patience and Discipline
Practicing patience and discipline is easier said than done. However, it’s essential to being a successful long-term investor. Who would have thought the market would recover from the financial crisis? Not many, but it did. Who would have thought the market would come back stronger after the initial drop from COVID-19 last year? Not many, but it did. Who would have thought the Dow would hit 30,000 last year? Not many, but it did. Sticking with your strategy and holding through tough times by being disciplined and staying patient is a virtue. One can foster this virtue by knowing time is on their side, understanding the power of compound interest, having a clear investment strategy, and understanding the importance of savings. To end on a quote by one of the greatest investors of our time:
“Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.” - Warren Buffet
What do you think are the most important things to know for a young and long-term investor?
Analyst's Disclosure: I am/we are long SQ, ETSY, CRWD, ROKU, TDOC.
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