If you’re in your 20s or 30s, the recent stock market crash could have started you thinking about investing for your future. But should Millennials invest in the stock market during these turbulent times? I’d answer ‘yes’ to that question, but perhaps not for the reason you might think.
Why I think Millennials should invest in the stock market
It’s tempting to view a stock market crash as an opportunity to invest when shares are down. After all, stocks could recover and boost your investment performance in the years ahead. Or, in today’s environment, you might latch onto a big-winning share with underlying operations benefitting from the coronavirus pandemic.
However, the truth is it’s hard to time the market. Shares could easily fall from where they are today. And a general recovery might take years. Nobody knows. But I reckon it’s a good time to begin a regular programme of investing right now, simply because you are young(ish). Indeed, that single factor means you have a long period ahead of you to invest. And time itself is one of the main drivers of compounded returns.
The process of compounding is a wonderful thing, and it could propel you to a wealthy retirement. Just like a cash savings account pays interest on previous interest, you can plough all your ongoing returns back into the stock market to compound your investments. So, dividend income and capital returns from share sales and corporate actions should all go back in.
And it’s worth it because compounding works exponentially. Those annual increases in your investment pot will likely increase over time. Indeed, after a long period of compounding — such as three or four decades — you could be astounded by how large the annual returns might have grown to be. But those first years of investing are so crucial. The early monthly investments you make in the beginning will have the longest period to compound and grow.
The stock market’s record on returns is good
The other main driver of compounded returns is the annualised rate of return. Little changes in the annual rate can make big differences to the eventual compounded outcome. That’s why it’s no good saving in a cash savings account. The interest rates are so pitifully low that compounding will likely fail to keep pace with general price inflation. And it’s a similar story with the returns from bonds and gilts.
But the long-term annualised return of the general stock market has been running at a high single-digit percentage. And I reckon there’s every reason to expect a similar outcome over the decades ahead. That strikes me as a good basis for beginning a regular programme of investment towards a retirement savings pot.
If you start now, while you are on the young side of 40, you have a big advantage. I’d say, don’t waste it!