The Importance of Taking Investing Risk At a Younger Age – Ad | This is a paid partnership with PensionBee
Our 7-year-old son has a growing love for football but it wasn’t always so.
As the quieter one of our two sons, playing team sports wasn’t always the number one thing on his list of ideal things to do.
Priority was always given to building legos, reading his collection of ‘Dog Man’ books, or watching the adventures on his favourite YouTube channel, ‘Unspeakable’ 😀.
But deep down, what he really wants is to be able to move with the ball as beautifully as Neymar or Messi.
That would be the ultimate outcome.
But given he could barely play football confidently a few weeks ago, the prospect of getting anywhere near this ultimate outcome seemed impossible.
I liken our son’s current journey with football to my journey when I was in my early 20s and I would cast my gaze to future optional early retirement and it seemed impossible.
How do I go from earning £26k back then to one day having that possibility of retirement?
Perhaps you can relate to this situation right now 🤔.
Life might seem an impossible struggle financially, and your default response could be to protect the little you have by taking as little risk as possible.
What you might not consider is what impact being too cautious earlier in your life could have on your later life.
There is an opportunity cost to our investment choices that isn’t always talked about.
One recurring regret for many people later in life when it comes to their investments and retirement outcomes is that they were too risk-averse.
There is something that we can learn from this today in order to make better investment decisions for a brighter future.
Below are some areas of consideration to help us better understand the importance of taking investing risk at a younger age.
The Importance of Taking Investing Risk At a Younger Age
1. Risk vs Uncertainty
These two words are often used interchangeably, but they mean two different but related things.
Here is a definition that I’ve come to memorise:
Risk is in the eye of the beholder and Uncertainty is inherent.
This simply means that what you see as risky will be different from what I see as risky.
In addition, how we manage risk is within our control.
On the other hand, uncertainty is inherent i.e. it just exists. There isn’t much that we can do about it.
We just have to navigate our way through it with the best information at hand.
A good example of this is the uncertainty that many people have around expected stock market crashes.
History tells us that this will happen some time in the future.
However, the misunderstanding of risk and uncertainty leads many people to stay out of the stock market (potentially for years) and they try to avoid the
risk uncertainty of stock market crash.
This of course comes at a cost as people miss out on likelihood of future returns due to the inability to take investing risk whilst they can.
The uncertainty of a crash could be ignored if one is investing for the long term, with a focus instead on managing the risk of poor investment returns by having ‘time in the market’ rather than ‘timing the market’.
2. Small Steps vs Doing Nothing At All
One of the most sensible ways to manage investment risk is to take small steps every month.
In monetary terms, I’m referring to the focus on investing money each month in the stock market via a process of Pound Cost Averaging.
This can act as a way of providing insurance against regret as you might fear investing a lump sum and then seeing prices fall.
However, if you invest consistently each month, you get to buy a particular fund at different prices, helping to average out the overall price that you invest in the stock market.
This not only gives you time in the market, but it also reduces your overall specific risk to price fluctuations.
You’ll recall that I mentioned my son’s growing love for football earlier.
One way that we've learned to ignore the uncertainty of him becoming a football star one day and instead reduce the risk of him doing nothing is to begin playing football together for fun every other day.
Doing this has not only increased his confidence but his love for the sport.
Every day of practice gets him closer to his future desired outcome of playing the beautiful game beautifully.
3. Income vs Growth
Another regret that I’ve come across from those years ahead in the game, is being too conservative when it comes to investing with a huge focus on income over capital growth.
Take investing in a pension, for example.
Given a lot of us have potentially decades ahead of us before we need to rely on our pensions for income, the investments that we choose to commit our money to matters.
If you have pensions from previous employers all over the place, a good place to start is to consolidate your pensions.
PensionBee helps you to combine your old pensions into one new plan.
They offer pension plans managed by some of the world’s largest money managers such as BlackRock, State Street Global Advisors, HSBC, and Legal and General.
These plans vary by risk appetite and values (for example, their ‘Fossil Fuel Free’ plan for ethical investors).
Their most popular pension plan called the ‘Tailored Plan’ invests your money differently as you go through life, moving your money into safer investments as you get older.
It focuses on higher-risk investments while you’re younger and lower-risk investments as you approach retirement.
Here is a pretty cool visual illustration of this:
The key point here is simple – For the majority of younger years, focus on investing for growth, and as you approach retirement, focus on investing for stability.
This approach gives you the most likely chance of building a retirement pot that grows to meet your future income goals.
4. Financial Literacy vs Risk Comfort
There is a positive correlation between good quality financial education and gaining comfort to make better investment decisions with our money.
The challenge with the digital world is that there is so much information everywhere and you have to do a lot of digging to find reliable sources of information.
With pensions legislation becoming more complex over time, there are greater calls for financial education in this area to be taught at schools.
There is also the consideration of the vast differences in outcomes of different genders, races, and socio-economic groups when it comes to attitudes towards money and investing for retirement.
There is a greater need for pension providers to step in and better educate their customers and the wider public more generally.
I personally find this growing library of knowledge from PensionBee very useful as an investor.
5. Sensible Investment Risk vs Reckless Gambling
The last 18 months (with the pandemic) has revealed new attitudes towards investing from the younger generation, thanks to the greater availability of investing apps.
There is a trend towards higher-risk short-term investing that’s more driven by feelings, the thrill of investing, and Fear Of Missing Out (FOMO) rather than sensibly considered ways of managing investment risks.
The Financial Conduct Authority (FCA) conducted research into financial risks and stated that:
“Research findings indicate that this newer audience has a more diverse set of characteristics than traditional investors.
They tend to skew more towards being female, under 40, and from a BAME background.”
This new attitude can result in short and long-term loss of money and damage future financial outcomes for a lot of people.
As such, the FCA is taking this seriously (see link above) and advises consumers to consider five important questions before they invest:
- Am I comfortable with the level of risk?
- Do I fully understand the investment being offered to me?
- Am I protected if things go wrong?
- Are my investments regulated?
- Should I get financial advice?
I’m highlighting this other end of investment risk-taking to say that although investing our money for growth is very important, we do have to be sensible about our approach and have answers for these important questions as we invest for important goals such as for our retirement.
What’s your personal experience of taking or managing investing risk? Comment below and share 😀.
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Remember that past performance is not a guide to future performance. The value of your investment can go down as well as up, and you may get back less than you invest. As with all investments capital is at risk.