Why More Young Adults Should Be Investing in the Stock Market

Imagine that you are 65, looking at your retirement account. Would you rather have $50,000 sitting in a low-interest savings account or over three-quarters of a million dollars from wise choices you made in your twenties and thirties?

While the allure of keeping money not needed for near-term liquidity needs in a savings account is understandable due to its perceived safety, investing in the stock market is a far better strategy to grow wealth over the long term.

Fixed income markets have rallied since January, ending the quarter with positive returns. The performance was driven by a spike in investor demand for fixed income, declining long-term interest rates on the heels of government spending cuts, and an expectation that the Federal Reserve may be approaching rate cuts later this year.

The Power of Compound Interest

When cash is left in a savings account, it earns interest at a relatively low rate compared to what long-term returns have been in the stock market. Although the stock market has volatility, by skipping out on investing now you are leaving a substantial amount of future money off the table.

By investing in the stock market at a young age, investors take advantage of compound interest, which grows their investments exponentially over time. As investors reinvest their returns, the value of their investment increases at an accelerating rate, resulting in wealth accumulation far outpacing the growth offered by a savings account.

To illustrate how powerful compound interest is over the long run, assume two individuals invest in the stock market. In this example, the stock market is assumed to return 8%, which is in line with long-term historical averages.

Investor 1 invests $5,000 per year from age 25 through 34, whereas Investor 2 invests $5,000 per year from age 35 through 65. By age 65, while Investor 1 only contributed $50,000, she accumulated more wealth than Investor 2 who contributed $150,000!

Investing in Stocks Beats Inflation

Inflation erodes the purchasing power of money over time as the prices of goods and services increase. Keeping money in a savings account offers less protection against inflation than the stock market does, as stocks grow earnings and dividends over time.

In an era where inflation may be higher than the Federal Reserve’s 2.0% annual target, the stock market offers more compelling inflation protection than a savings account.

Avoid Market Timing and Embrace Patience

While many are inclined to wait until a large market pullback to start investing in stocks, deferring investment proves costly.

The historical odds of cash outperforming stocks are low over the short-term, exceptionally low over the medium-term, and near zero over the long-term. Forget timing the market, just start getting in early and let time do the work!

Conclusion

While there are psychological reasons that prevent many young adults from investing long-term savings in the stock market, this comes at the expense of building meaningful wealth with stocks. Young adults have time on their side and should be seizing the opportunity to embrace stock market investing despite occasional periods of heightened volatility.

  Short-term volatility and market corrections can be unnerving, yet the sustained upward trend in the global economy serves as a fundamental anchor supporting long-term equity growth.

The best time to start was yesterday. The second-best time? Today.

Disclosure

RISE Investment Management, LLC ("RISE" or "RISE Investments") is an investment adviser registered under the Investment Advisers Act of 1940. Registration of an investment adviser does not imply any level of skill or training. This publication is solely for informational purposes and past performance is not indicative of future results. Securities investments are subject to risk and may lose value. Any historical returns, expected returns, or projections are provided for informational purposes only. Any description of products, services, and performance results of RISE contained in this publication are not an offering or a solicitation of any kind. No advice may be rendered by RISE Investments unless a client service agreement is in place. Advisory services are only offered to clients or prospective clients where RISE Investments and its representatives are properly licensed or exempt from licensure. All of the information in this publication is believed to be accurate and correct as the date set forth. RISE does not have or accept responsibility or an obligation to update such information.