Should I take investment risks when I am young?
When you first start to invest, you’re going to make mistakes—and big ones. The biggest one might be not taking any risks. Taking a risk in your investments doesn’t mean making fast, ill-informed choices—it means investing in areas with potential for quick growth but a lot of uncertainty. The best time to take these risks is early, because when you’re starting to invest, you have decades until retirement, which may sound daunting, but it’s an advantage. Here’s why:
Time is on your side.
The market fluctuates, but as a rule, it has continual upward movement. When your investment portfolio is young, you can afford to take on higher risks with your money because you have a long time to ride out market fluctuations before you need access to your money for retirement. An early loss due to riskier investing can be recouped in a couple of years or less with a few safe, steady investments. Take a quick look at historical market trends; even with events like The Great Depression or the 2008 recession, the market recovered and surpassed historical highs.
Risk means reward.
Big risks can equal big rewards, but they can also mean big losses. For example, look at the Dot-com bubble from the late 90s. Sites like Pets.com and theGlobe.com came out with huge marketing campaigns and record-setting IPOs—people were quick to invest, and everything about them looked great. Those investments turned into nothing in a short time. Today, Pets.com and theGlobe.com are nothing more than a link to other sites and a sad statement on the history of the internet’s early dark days.
On the other hand, Amazon and eBay managed to survive the bust and are now some of the best-known and largest companies in the world. At the time, investors had no way to know which dot-com would make it—everything was new and full of risk.
Risk is a long game.
High-risk investments are often in complex areas—think tech stocks or emerging foreign markets. Imagine explaining Netflix to someone 50 years ago—even more difficult, explaining the growth of China’s economy in the past 40 years. It’s easy to overlook how monumental these projects are because we have grown to see them as part of our world. But pumping 100 million hours of content a day into people’s homes and phones—or revamping the entire economic structure of the most populated country—were mind-blowing concepts when people first invested in them. They were ideas so big, so complex, that failure was the most likely outcome. Big ideas also take a lot of effort to get going and they often have more roadblocks than anyone could imagine. Having pieces fall into place to make these investments work is often out of your hands, so the odds of failure are higher.
Where young investors go wrong.
Like with most things, people learn to invest from their parents. One aspect that is often overlooked is that older generations have had different circumstances while investing and are in different phases of their investment journey. There’s nothing wrong with making safe, traditional investments. In fact, as you move through your career and get closer to retirement, it’s wise to transition your money into a slower-growing, more stable portfolio. However, starting out your investing journey how your parents are ending theirs will work to your disadvantage.