For younger investors though, one thing comes close to the proverbial sandwich on the house, says Gargi Chaudhuri, chief investment and portfolio strategist, Americas, at BlackRock.
“It’s never too early to start investing. You’re never too young,” she says. “Every single year you miss out on could be potentially quite costly from a compounding standpoint. There aren’t many free lunches, but compounding certainly is one of them.”
Chaudhuri gets it if you’re young and aren’t yet thinking about retirement. After all, it’s this big, amorphous thing that’s decades away.
“When I was 20 years old, retirement was the furthest thing from my mind,” she says. “Even though I was in the financial industry, I couldn’t wrap my head around the fact that I would one day retire.”
If you’re early on in your investing journey, you don’t have to think about the ins and outs of life after working just yet. Rather, focus on one powerful factor you can control: time in the market.
“Even if they’re very, very far away, I would encourage young investors to start thinking about their journey today because of the compounding that will take place,” says Chaudhuri. “Even if you leave the money [out of the market] for five or 10 years, you missed out on so much of the compounding effect by sitting in cash.”
Compounding interest is the mathematical force that helps you money multiply at an accelerated rate. A 10% return on a $100 investment nets you $10. Earn another 10% on your $110, and you’ve netted $11. Keep that going over the course of your career as an investor, and you can see how starting early can turn little numbers into big ones.
If a 20 year old invests $5,000 per year into a retirement account that earns a 7% annualized return, by the time she hits age 67, the portfolio would be worth more than $1.7 million. If she starts five years later, the total drops to $1.2 million. If she waits a decade to invest, she ends up with about $858,000.
Starting early is one thing, but many investors freeze when it comes time to choose investments.
Like many market experts, Chaudhuri recommends building a core portfolio of low-cost diversified mutual funds and exchange-traded funds. Spreading your bets among a wide variety of assets smooths your performance over time and helps mitigate the risk that a downdraft in any one investment could derail your performance.
Funds that track a broad U.S. stock market index, such as the S&P 500, are a good place to start. These mutual funds and ETFs give you exposure to hundreds of stocks, and because it’s inexpensive to manage them, they come with super-low fees.
But if a broad stock market fund is all you own, consider using a portion of your portfolio to branch out a bit, Chaudhuri says.
“Having a diversified view on markets and thinking about some of the themes that will drive markets for the next 20, 30, 40 years is really important,” she says. “Of course, U.S. markets are important, but I would tell someone earlier in their investment journey to think about the big changes taking place in the world right now, and how that could shape investment performance over the longer term.”
Different people think differently on the matter, and if this feels out of your depth, it may make sense to consult a certified financial planner.
For Chaudhuri, though, it means getting some exposure to developed and emerging markets abroad, even though they’ve trailed their U.S. counterparts of late. She points to demographic shifts in places such as India and Mexico, where younger populations are likely to be “big drivers of global growth over the next five, 10, 15 years.”
She’s also bullish on stocks from Japan, which appear to be reawakening and attracting new generations of investors after years mired in economic stagnancy.
These are only examples of course, but Chaudhuri’s message is clear: As you diversify your portfolio across a variety of markets, think about where the world is heading, not where it’s been.
“You need to think about how the world will change in the next 50 years you’re investing for,” she says.
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