No one likes losing money, so how can plummeting crypto and stock prices be a good thing? In the short term, falling asset prices wreak havoc on an investment portfolio. But if you’re a long-term investor under the age of 35, you could make the argument that you’d rather see the stock market and crypto prices stall or go down to give yourself time to build your savings and have more skin in the game.
Here are three reasons why investors under 35 should take a glass-half-full approach to the sell-off.
1. Your most meaningful income jump is just ahead
According to the U.S. Bureau of Labor Statistics, the highest-earning years for an American worker are between the ages of 45 to 54. The biggest jump happens during the transition from the 20-year-old to 24-year-old cohort to the 25-year-old to 34-year-old cohort, as education and experience lead to higher earnings.
However, many people in their 20s or early 30s are still paying off debt or earning limited discretionary income as they adjust to higher expenses. The median age to buy a home in the U.S. is somewhere between 33 and 35. So even if folks under 35 are making good money, there’s a good chance the majority of their savings is going toward a home and retirement.
The second-highest jump, and by far the most meaningful, happens between the 25-year-old to 34-year-old group and the 35-year-old to 44-year-old age group, whereupon median earnings increase by 23%. During this time, many people go from making good money to making great money, which allows them to rapidly increase their savings rate.
Once people reach age 35, there’s a higher chance they already own a home or have nearly enough saved to buy one. To put it another way, people over age 35 could be reaching the point when they have some of the major purchases they need and can start investing more heavily in the stock market.
As a result, they want asset prices to go up. But if you’re under 35, you likely don’t own many assets and still haven’t hit your prime earning years.
2. It’s a good time to save
To illustrate the benefits of being under 35 during a market crash, let’s say you were age 30 when the market crashed during the financial crisis. For this example, let’s assume you had $10,000 in the S&P 500 on Sept. 27, 2007, which was the peak right before the market started nosediving. By Nov. 20, 2008, your investment would be down over 50%. But losing over $5,000 would have never felt so good.
Why? Because if you had simply kept your cool and invested just $500 a month every month between October 2007 and December 2021, you would have woken up on Jan. 1, 2022, with $298,976.72. By only investing a total of $95,000, you would have tripled that investment in less than 15 years — earning an annualized return of 13.6%.
Now in your early 40s, you have a nice nest egg, and that’s with only saving $6,000 a year and basically starting from scratch. If you saved $1,000 a month, you would have $560,168. Saving $1,850 a month would have made you a millionaire.
The lesson here is that consistent savings leading into your prime earning years allow for asset accumulation and decades of compound interest to work its magic.
3. Inflation can benefit young people with debt
Inflation is one of the market’s greatest fears right now. The Federal Reserve is raising interest rates to combat it. In the process, this makes it harder for companies to borrow money. Low interest rates fuel economic growth and power investment. High interest rates cast a wet blanket on growth stocks.
It sounds crazy, but there are good reasons why younger people can sometimes benefit from inflation. Inflation simply means a dollar today is worth less than it used to be. Diluting the power of a dollar is good if you have debt.
However, this only works if inflation applies both to prices of goods and services and to the wages and salaries people get. If you have savings, then you must earn a higher return on your investments to offset the cost of inflation. But if you have fixed-rate debt and your income in dollar terms is rising faster because of inflation, it becomes increasingly easier to pay it off because you’re essentially getting a discount on what you owe.
Short-term pain, long-term gain
Stock market sell-offs are a dream come true for new investors, those who have kept money on the sidelines, or people who are finally starting to earn discretionary income and become new investors. If you’re under 35, renting, and don’t have a lot of savings, then you could argue that the last three years have been a net negative.
The U.S. stock market tripled between 2019 and 2021. Home prices have soared. And leading cryptos have experienced meteoric gains. It’s a difficult time to try and find value if you’re just entering the market.
Lower stock prices allow an investor to buy a share of a company for a cheaper price. If you’re under 35 and saving for retirement, chances are you’re going to be holding stocks for decades. So if a company with long-term growth potential is down well off its high, your hard-earned savings will go further if the company continues to grow and its stock price compounds over time.
The stock market is one of the greatest vehicles for building generational wealth. Despite that potential, it’s important only to invest what you won’t need in the short term, while keeping an emergency fund. That way, you’ll reduce the risk of a stock market crash or economic downturn impacting your everyday life.
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