Retirees face the biggest threat to their financial security they've ever encountered. Baby boomers are grieving over all the money they've lost in the bear market. Yet even amid all the gloom and doom, there's one group of potential investors who will end up being the big winners from the market's swoon: those under 40.
Most of the time, you don't hear much advice geared toward younger investors. One reason why people who are just starting out don't get much attention is that they typically don't have much money yet, and so their value to financial institutions in generating current profits is severely limited.
But those same attributes also put younger investors in an enviable position right now. Consider:
- Many younger people haven't even started investing yet. Coming in fresh, they don't already have big losses hanging over their heads. And most of those who did get an early start haven't saved enough wealth for their losses to be all that big -- at least in comparison to their older counterparts.
- With 30 years or so before you'll need your money for retirement, you have plenty of time to invest for the long haul -- and all the flexibility you need to consider whatever investments are most likely to get you to your financial goals.
- The market's drop has made stocks a whole lot cheaper. Young investors looking to buy stocks now will be able to pick up shares of quality companies a lot more inexpensively than they would have just a couple of years ago.
So, if you haven't started investing yet -- or you're not sure you're on the right path -- then here are a few things for you to think about.
Risk is lower
After the big market drop, stocks may seem incredibly risky. Many still are. Yet, in one sense, stocks are a lot less risky than they were during the bull market -- since most stock prices have fallen, you can't lose as much on a given number of shares as you could have when stocks were at their peak.
As an example, take a look at these stocks:
|
Stock
|
Price 1 Year Ago
|
Current Price*
|
|
Alcoa (NYSE: AA )
|
37.78
|
11.99
|
|
Bank of America (NYSE: BAC )
|
28.44
|
13.72
|
|
Mosaic (NYSE: MOS )
|
152.65
|
55.48
|
Source: Yahoo! Finance.
*As of market close 06/12/09.
These and many other stocks have lost 50% or more of their value since the beginning of the bear market. If you buy a share of these companies today, the most you can possibly lose is what you pay for them. But if you bought that share a year ago, you've already lost that much per share -- and you could still lose a whole lot more.
Meanwhile, while existing shareholders will have to see big gains just to break even on their investments, new investors can reap huge rewards. Shareholders in companies like MGM Mirage (NYSE: MGM ) and Barclays (NYSE: BCS ) who invested near recent bottoms have already seen amazing multibagger gains. But even after their big run-up, they're still trading below the levels they did just months earlier -- in some cases, well below.
Time is on your side
Not only are stock valuations attractive, but with a 30-year time horizon, you're in no hurry to see stocks recover. Older investors would be taking a risk buying in this environment, since stocks could potentially stagnate for years before moving higher. However, you might actually prefer that stocks stay low for a while, since it would let you buy more shares cheaply, rather than having to pay more later.
That time also gives you the flexibility to make more speculative investments. Companies like Green Mountain Coffee Roasters (Nasdaq: GMCR ) and Sohu.com (Nasdaq: SOHU ) sometimes pan out spectacularly. But for every success, other similar stocks will prove to be complete failures. When you're young, you can bounce back more easily from setbacks, and the successes do you the most good in setting the stage for your future investing career.
If you're a young investor, don't waste the opportunity you have today. Start creating an investing plan you can follow. The sooner you start, the better your chances are at a brighter future.
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