The 2020s is the decade when the investing choices of Gen Z, the demographic group born from the mid-1990s to the early 2000s, will be big news. Throughout these 10 years, they’ll enter young adulthood and start hitting life milestones
This weekend, I’d like to encourage Gen Zers to contemplate their retirement, which may be in 40 years or more. Difficult, I know, but do try.
What money may mean to Gen Z
Gen Z grew up in the wake of the recession of 2008/09. Many of them learnt about the world of money as their parents might have coped with difficult financial issues.
As they get ready to enter the workforce, they may have first-hand knowledge of the prospect of crippling student debt, the difficulty of finding permanent, well-paying jobs, and property prices that may seem out of reach.
Gen Zers are also possibly observing their elders who realise that the State Pension will likely not be enough to ensure a comfortable retirement (it currently stands at £8,767 per year).
Yet paying close attention to several investing decisions early on could mean retiring a millionaire versus having financial worries in older age.
In 2020, I hope that you’ll focus on two key aspects of your personal finances: saving of course, but importantly too, investing.
Why investing now is crucial
Let’s say you’re 25 and have managed to save £500 by December 2019 that you are now going to invest in FTSE 100 shares. And your 2020 resolution is to regularly invest another £3,600 per year (deposited at the end of the investing year) for 40 years. If you get an 8% annual return, then you’ll have £943,465 at the end of 40 years.
On the other hand, if you wait to start investing until you are 30, you will have £627,733 after 35 years. And if you wait another five years until you reach 35, at the end of 30 years, your account balance will only be £412,850, or less than half of what you could have had by investing a decade earlier.
The difference is due to the power of compound interest. This has a snowball effect on personal savings. As time goes on, interest leads to more money, over and over again.
The Foolish takeaway
At The Motley Fool, my colleagues provide detailed coverage of share investing and retirement planning. They highlight that over time, the broader stock market returns about 7% to 9% annually on average.
If you are new to the world of investing, then you could start with buying into a FTSE 100 tracker fund.
In 2020, the FTSE 100 is projected to return a dividend yield of about 4.5%. Its robust yield has helped support the index throughout the uncertainty caused by Brexit, the general election as well as global trade wars. Any capital gains delivered by the index would be an added bonus on top of the dividend.
Younger investors could possibly benefit from diversifying some of their holdings into tech shares too. A fund to consider could be the Scottish Mortgage Investment Trust, which is heavily invested in tech shares such as Amazon in the US and Alibaba in China.
I also expect ESG (which stands for Environmental, Social, and Governance) investing to become a growing trend among Gen Zers. My colleague Kirsteen Mackay has identified several funds with an ESG theme, including BlackRock BGF Nutrition Fund, Impax Environmental Markets Trust and the ASI UK Responsible Equity Fund.