We often hear that starting your investment when you are at a young age is a good thing as it allows more time for compounding to take effect. But this is on the premise that everything else remains constant and time is only the variable factor that is considered.
I've come across stories of many young readers recently who wanted to start their investment journey as early as possible, some are as young as 15 while another at the tender age of 18. The intern in our department is another one whom I've come across. We had lunch today and I get to find out more things about him and his "dreams". He is currently at his 2nd year at Ngee Ann Polytechnic, 18 years of age and has started investing in the stock market. When I asked him how he gets his capital, he told me that he dislikes studying and would prefer to go outside and earn side income, save and then invest, all of these at the expense of his studies.
While I do applaud his motive for investing at such a young age, I really question the need to do so for two reasons.
First, a lot of the knowledge and skills that you can learn in school are under-estimated by students. The fact remains that school and libraries are the two places where you can find a lot of information and resources where you can pick up valuable skills. At the young age of 18 or 15, I question whether the young investor has the necessary knowledge in investing.
Second, size is key in investing. At the early stage, most people would use their savings earned from their active income to build up their investment portfolio. So the amount that is earned from one's daily job played a key role in determining the size of your investment over time. The thing is by sacrificing his studies and probably therefore his diplomas/degrees, he would probably not get a job that pays a decent amount that is sustainable. We know that Talent is underrated while paper degrees are overrated, but that's the fact you experience in today's society. You can be the most productive and capable person in the company but if you lose out in terms of degrees and qualifications, you would still be bypass in the promotion list to a management position = FACT IN LIFE, GET THIS STRAIGHT.
So out of curiosity, I went to test out the two scenarios using Wealth Builder by investmentmoats. Let's call them Jon and Max.
Jon
- Decides to forgo his paper qualifications.
- Invested at the age of 18 through part-time jobs and income.
- Time to Maturity: 47 years (until the age of 65)
- Monthly salary: SGD 1,800
- Percentage of amount invested = 70%
- Income Growth Rate = 3%
- Wealth CAGR = 3%
Max
- Degree paper qualifications
- Invested at the age of 25
- Time to Maturity: 40 years (until the age of 65)
- Monthly salary: SGD 3,000
- Percentage of amount invested = 70%
- Income Growth Rate = 5%
- Wealth CAGR = 3%
Based on the two scenarios, we can see that Jon ends up with $2.7 and Max ends up with $4.7m by 65 years old. One of the few critical assumptions used is of course the starting pay and income growth rate which makes a whole lot of difference. There are many assumptions left out in this simple example but think you can see what I was trying to say here.
So investing at a young age is good, but too young??
