Investing–The New Rules: Young Investors Taking Hardest Hit

Economic crisis is affecting the younger investors more

In the latest installment of Investing-The New Rules, Rob Bennett claims that young investors are the hardest being hit by the economic crisis. Why are twenty-somethings are losing out the most? Several reasons…

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Investing — The New Rules
Young Investors Are Taking the Hardest Hit

#14–August 2, 2010

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Older investors have had time to accumulate more savings. So their stories are more dramatic. Still, there are reasons to believe that it is young investors who will end up taking the hardest hit in this economic crisis.

Say that you turned 25 in 2000 and began investing in that year. And say that you have been following the conventional Buy-and-Hold advice. And say that we see another stock crash sometime within the next few years causing stock prices to fall 60 percent from where they are today. How bad a hit would you be taking to your hopes of being able to achieve financial freedom someday in the distant future?

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You would be taking a very big hit indeed.

You’ve probably heard about the miracle of compounding returns. The way it works is, if you put $1 into savings at age 25, it grows to be worth $73 trillion by the time you are ready to retire. It’s a counterintuitive reality, to be sure. But those are the numbers that apply. There are calculators on the internet that show this to be so!

I’m exaggerating a tiny bit for dramatic effect, of course. But the compounding returns phenomenon is a real thing. A small amount put aside at a an early age really does grow to a large amount over a long stretch of time as the money earns money and then the earnings on the money earns money and so on and so on into infinity. It’s a pretty darn cool thing.

I have some disturbing realities to report.

You only get one chance at taking a big bite out of the compounding returns apple. The gal who started saving with visions of compounding returns in her head at age 25 in 2000 has seen ten years pass before her eyes without any of this magical compounding stuff taking place. She’s not going to get those 10 years back.

She was a good girl who followed the injunctions of all her elders that she start saving young. But the people who messed up the stock market (It was the Buy-and-Holders! Grrrr….) messed up her deal. She may get the benefits of compounding starting from age 35. But her hopes of enjoying the benefits of compounding starting from age 25 are busted. The wonderful bull market of the 1990s (which caused the bear market that followed) saw to that.

Older investors at least saw some benefit from the insane bull market while it was going on. The younger investor is experiencing the downside of that insanity without having had the opportunity to enjoy the upside.

Truth be told, this young investor’s chances of enjoying compounding returns starting at age 35 are not at all good. We are still at high valuation levels. We have fallen from insanely high levels of overvaluation down to merely dangerously high levels of overvaluation. But it could take another five or ten years (depending on how soon we face up to the realities) for us to pay back the $12 trillion investing debt we incurred in the late 1990s. A woman who did the right and rare thing by starting to save at age 25 may not see any significant compounding magic until she turns 45!

We all get four decades (from the time we turn 25 to the time we turn 65) to finance our retirements. A good number of us are overwhelmed with the costs of paying off college loans and putting together the down payment for a house during the first 10 of those years. So in practical terms most of us really have about three decades in which to accumulate the $1 million or so of savings we need to put aside to finance a decent middle-class retirement. The reckless investing advice of the 1990s has already cost us one of those decades and stands a good chance of costing us another if a good number of us don’t soon start speaking up about what has been done to us.

That would mean we we would have one decade left! To accumulate something in the neighborhood of $1 million. Oh, my!

It gets worse.

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ALSO at DBKP:
* Planning for Retirement: Retirement Riddle
* Investing–The New Rules: The Godfather Visits InvestoWorld
* Investing–The New Rules: Determining Stock Value Using P/E10
* Investing–The New Rules: The Monster That Ate the U.S. Economy
* Investing–The New Rules: Stocks Are Not Worth Buying Today
* Investing–The New Rules: Sarah Palin Will End Economic Crisis
* Investing–The New Rules: Dollar-Cost Averaging is a Loser
* Investing–The New Rules: John Bogle’s Evil Twin?
* Investing–The New Rules: Stock Return Predictor Not a Case of ‘Too Good to be True’
* Investing–The New Rules: The Stock Investor’s Weather Report
* Investing–The New Rules: Harness the Power of The Stock Return Predictor
* Investing–The New Rules: Get the Odds on Your Side
* Stock Investing: Much of Today’s Understanding is Primitive

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Buy-and-Hold investing strategies do not only wipe out investor portfolios. They wipe out entire economies. We incurred a $12 trillion investing debt in the late 1990s (that’s the amount by which the promotion of Buy-and-Hold strategies caused stocks to be overvalued). Take $12 trillion of spending out of a consumer economy and you crush it. It can take years or even decades for an economy to recover from that sort of hit (it was far lower valuations than those we saw in the late 1990s that caused the Great Depression of the 1930s).

When economies are crushed, millions lose jobs. Which group of workers loses the most jobs? The operating rule is “Last Hired, First Fired.” Older workers have generally had time to secure their positions. They have tenure or specialized skills that help them hold onto what they got. Young workers, not so much.

Those who have joined the workforce in recent years are for a good number of years going to have a hard time even holding onto their place on the ladder of success much less climbing it quickly. Don’t forget to take some time to thank those who came before you and sucked the blood out of the stock market so that they could enjoy 20 percent and 30 percent gains for a few years in the late 1990s.

And it gets still worse.

As the years go on, and young workers feel the stress of being behind in their saving efforts, they will feel too financially stressed to take advantage of promising opportunities they may open up to them. Many will say “no” to offers to get involved in the launching of startups because they will see too much risk in the prospect and will perhaps give up their one good chance to make the really big money by doing so.

Still, it’s better to be young. I don’t know too many rich 55-year-old yuppies who wouldn’t gladly trade places with a financially struggling 25-year-old. If you’re looking for things to make you feel better about what’s going down, there’s that.

by Rob Bennett
images: crosby dental; dbkp file

Rob Bennett created a simple retirement calculator called “The Retirement Risk Evaluator. His bio is here. And don’t even think about not checking out these Important Cautionary Words.

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