The title says it all, but it’s good to possibly have a reminder of how important it is to invest while you are young. Remember this article is 100% opinion, do as you please.
My girlfriend the other day told me while reading in a magazine that the rule of thumb was 100 minus your age. This represents what should be in stocks and the rest should be in bonds.
That rule of thumb is garbage. First off, if you are 25 years old, do not have 25% in bonds. Furthermore, I don’t think an 80 year old should probably have 20% in risky stocks either (maybe conservative cover calls perhaps).
Even thinking that people might think a 25 year old should have 25% in bonds, makes me furious. When you are young, the question should be “how RISKY am I going to be with my stocks”, and what are your overall ROI goals. I’m currently shooting for 25% a year (which is a highly aggressive rate) for example. So how important is it to be aggressive while you are young?
Let’s say you save $10,000 a year (every year) in your investment account for 25 years and let’s assume 2% is inflation (which will be taken out). The following also assumes taxation of 25% (Seek professional advice on calculating your own rate).
So -25% tax on gains, 2% inflation (taken from beginning balance), yearly additions of $10,000 (after-tax), and a return listed below. The results are:
- 1.0% (current high yield savings) = effective loss of $36,839 in 25 years
- 1.8% (current rate of 5-year CDs) = effective loss of $20,066 in 25 years (assuming renewing at 1.8%)
- 3% = effective gain of $8,289 in 25 years (shown to right)
- 5% = effective gain of $65,704 in 25 years
- 7% = effective gain of $139,045 in 25 years
- 10% = effective gain of $289,659 in 25 years
- 15% = effective gain of $710,381 in 25 years
- 25% = effective gain of $3,027,364 in 25 years
Now to be fair, it’s probably insane to count on a 15% or 25% ROI every year for 25 years, but I would personally argue 7-10% is very do-able.
So there it is, if you buy into a 5-year CD and inflation is 2%, you’re getting killed. Furthermore if you are buying into a 5-year CD as a 25 year old, you probably ought to reconsider the CD and consider buying a rifle and water rations (since you think the end is near).
When you are young it is absolutely vital to save and find a viable investment strategy. If I was to actually obtain 25% yearly return for 25 years, every $1 I saved today would be $263.70 or $47.02 after-taxes and inflation in 25 years.
So find your goals and get saving now.