It’s Pretty Great to Be Young
I was recently blessed to speak at a high school business class. It's a talk I've given about once per semester for the past two years. The topic of the lesson was investing, similar to how I teach it to my clients.
During my talk, I tried to frame investing risk through the lens of the long-term U.S. stock market history. I've written about this topic several times, but today, I'm going to share an idea that could (er, should) re-shape our perspective of risk...and the power of compounding for young people.
We have solid stock market data going back to 1870, just five years after the Civil War ended. That's 154 years of history! Through year-end 2024, those 154 years produced an annual return of nearly 9.2%. Yes, it's a mess. Yes, it's volatile. Yes, it's crashed.....many times. But through all that, 9.2% annual returns for 154 years (and 10.4% for the last 100 years!). For the sake of simplicity, let's just call it 9%.
My audience this week was a collection of high school kids in the 16-18 year-old range. For the sake of this little thought experiment, let's say they averaged 17 years old. If a 17-year-old simply invested $1,000 into the U.S. stock market today and planned to patiently keep it invested until age 65, what would that look like? At a 9% annual return, that single $1,000 contribution would eventually reach approximately $62,000! Think about that! If you're 17 years old and make a decision to invest one time, that decision would yield a 62x outcome by age 65.
"Yeah, Travis, but what if something bad happens!?!?"
Something bad WILL happen. In fact, during a 48-year stretch between 17 and 65, many bad things will happen. We will experience many recessions, stock market crashes, and other unknown calamities.
"Yeah, Travis, but what's the worst that could happen?"
I'm glad this imaginary voice in my head asked that question! Here's a fun fact. During our 154 years of history dating back to the Civil War, the WORST 48-year stretch in U.S. stock market history provided an annual return of 5.64%. That was the 48 years ending in 1920, a period in which cars hadn’t even yet been invented. Had someone invested $1,000 at age 17 and experienced the WORST 48 years in history, their initial investment would be worth approximately $14,000 at age 65. To put it another way, historically speaking, the WORST you could do by investing $1,000 into the U.S. stock market at age 17 and letting it sit until age 65 is yielding a 14x outcome.
How risky does that feel? The worst historical outcome for a 48-year investment term is making 14x your money. "Risky" isn't a word I'd use to describe that. For me, there are three big takeaways today:
Time is our friend
History is on our side
It's pretty great to be young
Please forward this to a young adult in your life. They need to hear it.
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