One of the greatest advantages a young investor has is time. Investing legend Peter Lynch, who saw average annual returns of 29% during his tenure managing Fidelity's Magellan fund from 1977 to 1990, encourages all investors to start investing young by saving money in a retirement account. The advantage of putting your money into a retirement fund, explains Lynch, is allowing the miracle of compound interest to occur without paying taxes. "Start saving early," says Lynch, "and the numbers are amazing."
If you start by investing $1,200 in the stock market every year and gain an average of 9% annually -- the stock market's historical average annual return -- your portfolio would grow to a total of $121,136 after 25 years. If you continued investing $1,200 annually and earning 9% each year for another 15 years -- adding new money to your investments for a total of 40 years -- your total portfolio would be worth $479,642.
Time is clearly on the side of younger investors. The above example demonstrates why Peter Lynch suggests you start saving and investing in a retirement account now. Starting to add funds to a Roth IRA at age 20, versus waiting until you are 30 or 35 years old, could mean a difference of hundreds of thousands (or even millions) of dollars by the time you retire. The longer you wait to start saving for retirement, the bigger a financial hole you're digging yourself.
Invest in what you know
In addition to time, younger investors should make use of Peter Lynch's "invest in what you know" philosophy. "The worst thing you can do," contends Lynch, "is invest in companies you know nothing about."
The greatest investments are often right in front of us throughout our daily lives. I became a student at Berea College in 2010 and will graduate in May. Looking back on my experiences over the past four years, I now realize how many great investments were right in front of me all along. Let me explain.
When I first came to Berea in August 2010, I signed up for Amazon.com's (NASDAQ:AMZN) Amazon Student service. This service gives students the opportunity to receive free two-day shipping on a wide variety of products for dorm rooms, classes, and other college essentials. Jeff Bezos' innovative leadership has helped Amazon expand sales at an average annual rate of 21.46% since 2010 to $74.5 billion in 2013. Amazon's operating cash-flow production increased at an average pace of 11.9% annually since 2010, giving Bezos and company the firepower to continue Amazon's innovative streak.
Investors have been amply rewarded by the stellar performance of Amazon, with the stock increasing 148% since I began using Amazon Student as a college freshman in 2010, far outpacing the S&P 500's 66% gain over the same period.
Fast-forward to the summer of 2012, between my sophomore and junior years of college. I was participating in an intensive summer social entrepreneurship program in Appalachia, exploring the thriving towns of western North Carolina and the comparatively struggling counties of Eastern Kentucky. In particular, my classmates and I focused on how social-media customer review websites, such as Yelp (NYSE:YELP), could put businesses in Eastern Kentucky on the radar for tourists.
Since the summer of 2012, the S&P 500 has increased by 33%. Yelp's stock, it turns out, has increased 319%. Since 2011, Yelp has grown sales at an average annual rate of 67.3% while seeing cumulative customer reviews increase 46% annually over the same period to 53 million in 2013. Yelp's ability to consistently attract users -- and generate impressive sales growth from those users -- has handily rewarded investors with market-beating returns over the past several years.
In February 2013, I attended a college workshop on how to effectively use LinkedIn (NYSE:LNKD) as a platform to market job skills and boost my chances in the job hunt scramble. I set up my LinkedIn profile, but foolishly (with a small "F") did not consider researching the business as a potential investment. Had I delved deeper into LinkedIn, I would have found a rapidly growing business guided by Jeff Weiner, a young and visionary leader. Since 2010, LinkedIn has grown its base of cumulative registered members from 90.43 million to 276.84 million in 2013 while increasing operating cash flow an average of 43.19% annually and sales 58.35% annually since 2010.
LinkedIn stock has increased 55% in value since I started my LinkedIn profile in early 2013. The S&P 500 increased 21% over the same time frame. Starting to get the idea?
The greatest long-term investment returns will often be generated by the businesses creating and offering the products and services we use in our daily lives. Of course, not every business whose products you use will be a great investment, but simply looking around you is a good way to start considering investment opportunities. Start by researching the businesses behind the products you and your friends know, use, and love. Younger investors are in a particularly apt position to spot up-and-coming trends and potentially stellar investments.
Foolish final thoughts
Whether you are a new or experienced investor, it's wise to take the words of investing greats like Peter Lynch seriously. Warren Buffett similarly encourages parents to teach their children the importance of saving money at an early age.
Young investors have more time on their side for compound interest to accelerate their returns. Young investors can also capitalize on their knowledge of consumer trends, as well as new and popular products, to help spot potentially rewarding long-term investment opportunities. Start investing today, explore and invest in what you know, and practice patience as you build a sound retirement portfolio over the long haul.
Editor's note: A previous version of this article listed Amazon's 2013 sales as $74.5 million instead of $74.5 billion. The Fool regrets the error.
David Kretzmann owns shares of Amazon.com and LinkedIn. You can follow David on his Foolish discussion board, Pencils Palace, on CAPS, or on Twitter @David_Kretzmann. Learn more about David's Pencils IRA Project at Fool.com. The Motley Fool recommends Amazon.com, LinkedIn, and Yelp. The Motley Fool owns shares of Amazon.com and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.