Tuesday, April 16, 2024

Younger Investors Will Always be Better Off With Compound Interest

When discussing the merits of compound interest as an investment strategy, you will invariably see the term “conservative” mentioned. Since we are conditioned to think of conservative philosophies as mostly being in the purview of older individuals, it is easy to think about younger investors shunning compounding strategies in favor of a more “progressive” approach such as trading technology stocks on Wall Street.

Start Earlier for Better Compounding

Attaching the conservative label to compound interest is absolutely correct, but there is an inherent problem with associating this strategy exclusively with older and more prudent investors. The absolute truth about compounding is that it will always work better when it is started as early as possible; in fact, younger investors have a lot more to gain from compound interest when compared to their older counterparts.

play around with the parameters of an online compound interest calculator

It is easy to see how the power of compounding is more beneficial to younger investors. All you have to do is play around with the parameters of an online compound interest calculator, in which one of the variables will always be the number of years you will set the strategy for. The investment horizon of a 20-year-old compound interest investor will always look better than the one calculated by a 40-year-old individual, particularly when young investors see themselves earning more money and being able to increase their periodic contributions later on in their lives.

Compound Interest Reduces Long-Term Risk for Younger Investors

At a time when younger investors are taking major risks on trading apps such as Robinhood, or by getting into cryptocurrency trading, compound interest seems like a breath of fresh air. Millennial investors who set up compounding portfolios now are not being more progressive than their peers, but they are being smarter in terms of reducing their investing risk.

better off taking the conservative road

You do not have to be conservative about music or fashion; in fact, you should be progressive in this regard because it is more fun to do so, but you would be doing your investment portfolio a favor if you allocate more than 50% of it to compound interest instruments such as high-yield savings accounts, highly-rated bonds, and certificates of deposit. This is one aspect of life in which you would be better off taking the conservative road.

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