Generation Z is loosely defined as those born between 1997 and either 2012 or 2015, depending on the reference source. This puts Gen Zers (or “zoomers”) at roughly 6 to 24 years old currently.
While there aren’t many 6-year-old investors, those in their teens and early twenties should already be setting aside funds, no matter how small, to help them meet their financial goals. The benefits of investing at such a young age are immense, and they are often overlooked, underappreciated or misunderstood by Gen Zers. Here’s a crystal clear look at why now is the optimal time for Gen Z to begin investing for the long run, including hard-dollar examples of the fortunes that can be potentially made.
The great news for Gen Z is that there has never been an easier time to invest. Just a few decades ago, there was no such thing as an “online broker,” and there were certainly no mobile apps where you could trade stocks with just a few touches of your finger.
Investors at many firms can now trade stocks and ETFs without paying any commission at all. Even some brick-and-mortar firms, like Merrill Lynch and its online platform Merrill Edge, allow customers to trade stocks and ETFs for free. In fact, for a Gen Zer who likely doesn’t even need the services of a full-service broker, it can actually be harder to find a broker that does charge commission than one that doesn’t.
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Besides low costs, Gen Z benefits from investing in an age with so many different ways to invest. Until quite recently, buying a stock meant that you had to pay at least the price of a full share to own it. That made buying stocks like Amazon, which recently traded above $3,000 per share, cost-prohibitive. Now, investors can buy fractional shares of stock, meaning if you only have $100 to invest, you can still buy Amazon — you’d just own about 0.033 shares. But when investing in the stock market, the share count doesn’t matter. If Amazon were to trade up 25%, you’d still earn a 25% return on your money, even if you only owned 0.033 shares.
The biggest reason why Generation Z should invest now is to harness the power of compounding. Over time, the money you invest earns dividends, interest and/or capital gains. Over time, those gains are compounded, as you earn additional interest/dividends/capital gains on the money you’ve already earned.
Let’s say you invest $1,000 and earn 10% per year for 10 years. With simple interest, you’d earn $100 per year and end up with $2,000 at the end of your 10 years. But with compound interest, you earn interest upon interest. So, after 10 years, with compound interest, your portfolio value would be $2,593.74 — or nearly 30% more.
Compounding becomes even more dramatic if you extend your time frame, which is why it is so important for Gen Zers to start young. Let’s make things a tad more complicated and say that you initially invest $1,000 in an investment that returns 10% per year, but that you also add $100 per month. If you start at age 20 and retire at age 65, that’s 45 years of investing and compounding. Over that time period, your total investment would be $55,000, or your initial $1,000 plus 45 years of adding $100 per month. But your total value will have grown to $935,575.29!
That’s right, if you can start with $1,000 and earn 10% per year on your investments, just $100 additional per month can get you to just under $1 million by age 65.
But, what if you waited “just” 10 years until you were age 30?
Given the same parameters — $1,000 to start, $100 per month and a 10% annual return — that money would grow to just $353,331.68. Big difference, no? To reach the same $935.575.29 figure while starting with $1,000 at age 30, you’d have to kick in almost three times as much — about $280 per month.
And if you were to wait until age 40? You’d still be saving for 25 years, but your $1,000 initial investment plus $100 per month would only net you $128,851.18.
The bottom line is that by investing early, you can turn relatively small investment amounts into a huge nest egg by the time you are ready to retire.
Time To Recover From Losses
In addition to the compounding power of time, that long time horizon you have for your investments as a Gen Zer can also translate into time to recover from losses.
If you invest from age 20 to age 65, you will no doubt face a number of bear markets, defined as a market selloff of at least 20%. In some cases, those drawdowns can reach 50% or more. There’s no doubt that those selloffs are scary as you go through them, but as a young investor, you have time to recover. Most bear markets last about a year on average, and the bear market of 2020 lasted just 33 days.
The point is that over time, the market has always recovered and gone on to new highs. As a young investor, if you can take a long-term view and remove emotion from the equation, you can ride out those dips in the market and reap the benefits of your investment strategy over the long run.
