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Investing Made Easy (Part II): When Should I Start?

Between the ages of 16-22, I was employed at three different summer jobs. First, I worked in the concession stand in our community swimming pool for several years. I then moved up in ranks and became a lifeguard for two summers. During the second season of being a lifeguard, I only worked in the evenings because during the day I had taken a second job as a construction worker. That summer’s dual-employment schedule was brutal, but I made more money than I had ever seen to that point.

Mom and Dad blocksOnce I graduated from college, I worked full-time in construction while I waited for my bride-to-be to finish her degree. As I recall those years, I really don’t remember having any focus on where my money was going. I was saving some, spending some and giving some, but I never took the time to understand how money, placed in the right type of instrument, could grow and enhance my lifestyle.

My wife brought into our marriage a small mutual fund, compliments of her grandmother’s generosity. Over the years since it’s inception, the fund had grown and paid for some college expenses and for her car in total. “Hmmm,” I thought. “Money invested in stock market funds grows over time and pays for things we want or need. Cool idea. Wonder how this works?” That’s when I started my investing journey.

You may be asking, “How do I know if I’m ready to start investing? When should I start?” They are great questions that I would like to shed light on today in Part II of this Investing Made Easy series. And I’m sure to hear it for this comment, but deciding whether or not to invest is sort of like deciding to become a parent – we are never quite sure we are ready.

The best a would-be parent can do is to prepare as much in advance for what lies ahead. My wife and I read a ton before the birth of our first child. We took the breathing classes. We went through all the medical tests. We talked to other parents. Even with all that, at some level we still felt inadequate. The only way to truly understand what it’s like to be a parent is to become one. So we made the choice to have child.

It’s the same with investing. You won’t know everything at the beginning. That’s OK. The best one can do is read and research and read and research some more to gain a basic knowledge of the investing process. Track the progress of some funds for six months. Talk to people who have had success. When you get the basics and decide you are ready, pull the trigger and begin. There is no magic age or time to begin investing. A 17-year old can learn how to do this and begin investing before they graduate from high school. I wish I had.

That being said there are three varying positions in the investing world as to when someone should start the investing process.

Position #1: Wait for the right time based on stock market performance

Visit any finance site that tracks the daily fluctuations of the stock market and you will run across a chart or two that details the historical performance of the three major averages that are reported on each day – the Dow Jones Industrial Average, the S&P 500 and the NASDAQ. Clicking on these charts reveals the up and down movements of the major averages for any time period you select – 1 month, 3 years, 10 years, etc. You can see this in the 5-yr. chart of the S&P 500 below:

5 yr. S&P 500 chart

Source: Yahoo Finance

As you can see, there are dips and there are peaks. The essence of position #1 is that an investor should wait for a dip in stock prices and use that time to invest. It seems to be a logical approach, to only buy at a lower price level.

The issues with this position are twofold:

#1 – Emotions run high when the market is in a downtrend. Fear can be rampant. Even seasoned investors succumb to the fear that the sky is falling and completely go against their investing philosophy at times. How much more so a beginner.

#2 – We cannot predict future trends in the market. As you can see there was a tremendous buying opportunity in late 2008 and early 2009 when the economy was going through an economic meltdown. Since then the market has gone generally up with smaller pullbacks in the middle of 2010, 2011 and 2012. Anyone who invested in the S&P at any point since the low of 2009 and held their position to today has made money. Those who are waiting for a pullback like the one experienced in 2008-09 may be waiting long time. In the meantime, they have missed out on a huge return in stocks.

Position #2: Invest now, regardless of current debt or financial circumstances

This position is rooted in the belief that time is the most critical element in the investing equation. It doesn’t matter if you are a high school student making minimum wage at a summer job, are a college student paying your way through school or are married with large amounts of consumer debt.  A person must start now. The earlier one can begin investing, even in small amounts, the more one can maximize big returns in the long run.

This is a valid point and can be seen in the following examples:

“Person A” begins investing at age 19. She contributes $150 per month ($1,800 per year) for 8 years, until the age of 26. The total amount of money invested equals $14,400. If she were to average 12% return per year, by age 65 that investment would have grown to $2,264,026. Keep in mind that is without investing another dollar after the age of 26.

“Person B” begins investing at age 27. He contributes $150 per month ($1,800 per year) for 39 years, until the age of 65. The total amount of money invested equals $70,200. If he were to average the same 12% return, by age 65 he would only have amassed $1,580,051. Person B invested $55,800 more actual dollars over the investment period yet fell $683,975 short of the mark achieved by Person A.

What a difference time can make. (To play with your own figures, use the investing calculator here.)

Position #3: Invest only after one becomes free of non-mortgage debt

The basis of this position contends that an individual is best served by reaching certain financial milestones before they begin to invest. These milestones would include ridding themselves of all non-mortgage debt (i.e. credit card debt, school loans, car payments, etc.) and establishing a healthy savings account to handle life emergencies when they occur. Only after these financial milestones have been achieved should a person begin to invest for retirement, college and to build long-term wealth.

This position has proven to be controversial because of the time issue. If a person waits X number of years to accomplish debt payoffs and savings goals before investing, they would be missing out on critical time where investments could be growing. Indeed, as I’ve already pointed out, a person not invested for the last 4 years would have missed out on very nice returns.

While that may be true, I believe the psychological benefits to position #3 are routinely discounted. It is an incredible achievement to have all non-mortgage debt paid off and to have accumulated a fully funded emergency fund of 3-6 months expenses. It brings peace of mind and allows for freedom of choice again. In addition, it frees up larger amounts of money to be potentially moved toward investments because that money is no longer allocated to pay off debts. I don’t think we can dismiss this position as foolish and invalid just because a person chooses to clean up their financial mess and get on solid footing before they tackle investments. That’s actually a healthy personal financial move. In the long run, it may prove more beneficial in ways not calculated in investment dollars alone.

So what’s going to work out best for you? Of course, it is a personal decision that only you can make. My conclusions are that the practice of timing the stock market as a means to begin investing should be discouraged. Positions 2 and 3 are both valid I believe and should be based on an understanding of your own situation and investing acumen.

In the next article of this series I’ll tackle the question “Where (or in what) should I invest?”

When did you begin investing? Do you think it’s better to wait until non-mortgage debt is paid before investing?

Blocks Image Credit: FreeDigitalPhotos.net

Next Post: Don’t Chase Hungry Bears Through the Woods

Prior Post: What’s Rich to a 6-Year Old?

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Comments

  1. Your Daily Finance says:

    There’s never a right time in my opinion. Just start when you have money the sooner the better. There will be ups and down but there are a lot of emotions in the market. People panic all the time. Its never too late or too early.

  2. I like position #2…it is never too soon to start investing. I think that for #3, I might include student loan debt or other lower interest debt. I think you can balance investing with debt payoff. Of course if you have a large amount of high interest debt, then paying it off should be the priority.

    • Position #3 is one widely taught by Dave Ramsey. Per his baby step plan, investing begins at steps 4 and 5 (investing for retirement and kids college) after all non-mortgage debt is gone and a fully funded emergency fund has been established.

  3. Mike@WeOnlyDoThisOnce says:

    That’s a really wonderful way to think about things, and very pragmatic as well. Thanks for sharing.

  4. I like your third point, though I started to invest before my non-mortgage debt was paid off (student loans). I have an employer match so I would be losing money by not participating. Right now I do not invest in an individual account; instead I just spend time researching investments and having fun learning about the investing world. I am currently interested in learning more about fx and commodities, though I do track the DOW pretty closely as well as the sector that I work in (health insurance). It’s definitely fun to see how investing works, as well as test economic theories (though they may take decades to play out long-term) and how various events impact price and supply/demand. It’s amazing how much influence the Fed has on the market…simply incredible.

    • It’s good that you are taking advantage of the employer match. That’s an investing must I believe. I try to keep my investing life pretty simple. Mostly mutual funds divided between small, medium and large cap. I also have a few bond funds and a couple of individual stocks – but didn’t invest in those until I learned how bonds work and more about how to value companies.

  5. Kim@Eyesonthedollar says:

    Missing out on investing to pay off a low interest loan is not very smart in my opinion. If it is only for a year or so, maybe, but not for multiple years. I wish I’d started investing when I had my lifeguard job too!

    • I wasted so much money in my youth on silly teenage things. That is one of the reasons why I enjoy teaching personal finance to high schoolers, so they don’t make some of the same mistakes.

  6. I technically started investing when I got my first 401k with my job. I didn’t start investing in my own Roth until I was out of debt. I do wish I would have started much earlier, but there is nothing I can do about it now.

  7. Shannon Ryan says:

    Great points, Brian, I bet a lot of people wished they would have started investing a $150 per month when they were 19, myself included! 🙂 I understand the desire to have a clean slate before starting investing, but I would still encourage people to try to invest at the same time. Being debt-free is priceless and one can never overlook the benefits of that freedom. However, I think it’s possible to do both, if you’re willing to stretch yourself a bit. Most of your money should rightfully go towards debt repayment, but even investing a little bit can be very rewarding too. Especially if you have a 401k with a company match – try to invest enough to earn the match at least.

  8. I haven’t started investing yet, because I thought I should pay off my student loans first. However, after reading so many articles about how it’s best to start early because you’ll be missing out on potential earnings, I realized that I can handle both. I plan on starting to invest in a few weeks, and I’m looking forward to part 3!

    • Awesome that you are getting started! As I mentioned in the article, whether or not to start investing before or after debts are paid is a widely debated topic in the personal finance world. I see positive arguments on both sides of that issue. If you go the route you are intending, don’t do anything with your investments that would disrupt your loan payoff plan. Keep it simple. I’ll talk about that more in part 3.

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