Why Taking Investment Risks When You’re Young Is Important
When first starting to invest, you’re going to make mistakes—and big ones. The biggest one might be not taking any risk. 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 is a long game
High risk investments are often in complex areas—think tech stocks or emerging foreign markets. Imagine explaining Netflix to someone 20 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 to 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.
Risk means reward
Big risks can equal big rewards, but it 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 to nothing in a short time. Today, Pets.com and theGlobe.com are nothing more than a link to another site 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.
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 a different phase 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.
As you and your investments grow, it doesn’t mean you have to give up on a lot of potential money. You can still invest in high-risk areas. The key is to do so with a smaller percentage of your savings. There is no reason to stop making money, but as you grow closer to retirement, it’s important to protect more of your investments.