Overview – Starting as Early as Possible May Not Always Be Sensible
Time and time again, when deciding to pursue a major endeavour the most common advice is to start as early as possible.
Why? Because time is the one resource we cannot recoup: once certain windows of opportunity have passed us by, they’re gone forever. By starting an endeavour as early as possible, we give ourselves the highest probability of allowing things to unfold to their full potential.
A very young child with ambitions of becoming a professional athlete still has a fighting chance of making that happen given the abundance of time they have to train and develop, but for a middle-aged person, that window of opportunity has largely passed.
When it comes to investing, the same advice of starting as early as possible is also given. The rationale is to allow an investor’s portfolio to grow as much as possible and to give themselves enough time to correct any mistakes they make.
Despite this sound reasoning, it’s possible to start investing too early, and in doing so cause an investor more harm than good. How is that possible? Let’s find out.
Investing Too Early Is a Very Real Possibility
“Investing too early” may at first sound like an oxymoron. How is it possible to start doing something beneficial too soon? Isn’t the point of investing to give yourself as much time as possible to allow your money to grow?
While getting an early start to investing can certainly be advantageous and is a smart decision for many people, it makes a major, implicit assumption: the investor-to-be is in a good position to start.
So many investors get caught up with starting as soon as possible that they forget to seriously ask themselves if they’re in a position to start at all. As a result, some investors make the mistake of investing too early, putting themselves at a disadvantage right from the get-go.
No sensible person would begin a major endeavour without first ensuring they are in the best position possible to succeed, yet some new investors still make this fatal mistake and end up paying a very hefty price due to their hastiness.
For some people, getting an early start with investing makes perfect sense, but for others, they may have very legitimate reasons not to start right away.
Some Common Reasons To Put Off Investing For Now
If it’s possible to start investing too early due to not being fully ready yet, in what specific areas can a prospective investor be unprepared?
There are many aspects, both big and small, that contribute to an investor’s overall performance and chances of success. There are several aspects that we could go over, but instead, we will focus on a handful that will pertain to most investors.
Let’s go over what they are.
i.) Unstable Financial Situation
Before ever investing your first dollar, you must first make sure that your personal finances are in order.
Now, this doesn’t mean you need to have millions of dollars lying around or have no debt to start investing – many investors have been able to successfully start their careers with modest financial means, and many continue to do so.
Rather, if you find yourself constantly strapped for cash, have a lot of outstanding debt, and are on the precipice of financial ruin, then investing should be the very last thing on your to-do list.
Investing, if done correctly, can serve as a major boost to your finances – it’s no secret that many people have created vast fortunes for themselves through disciplined and consistent investing.
However, investing is not the solution to fixing a precarious personal financial situation.
That’s because the power of investing lies in its ability to “scale” based on an investor’s means – a 5% return on $10,000 of capital is $500, while this only translates to $5 on $100 of capital.
If a hopeful investor can barely scrape together enough money for investment purposes, then they won’t see any noticeable returns, meaning their precarious situation will be little changed.
It’s important to remember that investing will not make you wealthy overnight. You can’t expect to invest $400 and then have that grow to $4,000 a few days later. Even if such a get-rich-quick scheme existed, chances are there is a very high risk of you losing all your money, putting you in an even deeper financial hole.
Investing is most effective when it’s done from a position of financial stability, so prospective investors who cannot confidently say their financial situation is stable may want to hold off for now.
ii.) Lack of Emotional Discipline
We’ve discussed the relationship between emotions and investing before (here and here), and once again we will talk about it because its importance cannot be stressed enough.
In investing, the ones who easily lose their cool are the ones who stand to suffer the steepest losses.
One of the keys to investment success is to maintain a level head to remain as rational as possible: succumbing to your emotions usually leads to irrational decision-making, and these irrational decisions almost always harm an investor’s portfolio. No good investment decisions are ever made when they’re fuelled solely by untethered emotions.
Sometimes the market can reach all-time highs, but it can also do the opposite and plummet to unthinkable lows, as was observed in March 2020, when market “circuit-breakers” were triggered frequently. Investors must have the emotional discipline needed to navigate these ups and downs without losing their rational thinking.
To be an investor means knowing how to maintain a level head even if the world around them seems to be falling apart.
History has repeatedly demonstrated that investors who stood their ground in times of emotional chaos almost always came out on top. The Dot-Com Bubble, the Housing Market Bubble, the Covid pandemic – investors who continued to act rationally during these tumultuous events would’ve walked away relatively unscathed.
Therefore, if an investor-to-be still struggles to keep their emotions in check, especially during times of chaos, then they run the risk of investing too early.
One bad, emotionally driven decision can inflict lasting damage on a portfolio. Imagine how much damage can be done if these types of decisions are made repeatedly due to an investor’s lack of emotional discipline.
iii.) Inadequate Knowledge of Investing
It’s generally understood that a minimum level of knowledge is required before pursuing any sort of endeavour.
Anyone who wants to start playing competitive basketball should at least be aware of the rules of an organized basketball game. Someone who wants to start playing the piano needs to know how to read sheet music.
Of course, not every endeavour requires the same level of minimum knowledge needed to start. The minimum knowledge needed to become a doctor will be vastly higher than what’s needed to start playing a certain sport.
When it comes to investing, it can be argued that a moderate to moderate-high level of knowledge is required before starting. Investing isn’t so easy that all you need to do is watch one 10-minute YouTube video explaining what a stock is then proceed to go all-in.
Now, this doesn’t mean prospective investors need to know everything right from the start. Continuous learning is a cornerstone of an investor’s success as new knowledge, ideas, and norms routinely appear. Failure to keep up with the times will prove to be disadvantageous.
However, prospective investors should at least know what an investment paradigm is, some common analytical ratios/metrics, and the difference between a stock and a bond, to name a few things.
If investors-to-be find themselves unfamiliar with these fundamental areas of knowledge, then they may want to hold off on investing until those knowledge gaps are addressed.
What’s Considered ‘Too Early’ to Start Investing, and When Is Someone Considered to Be ‘Ready’?
Upon reaching this point in our discussion, there are two big questions that we will need to address. The first is “What’s considered ‘too early’ when it comes to starting your investing career?”
It’s easy to brush this off as a trivial question by attributing “too early” to simply being too young. However, starting too early isn’t necessarily a matter of age, though it can be; rather, it’s a matter of circumstance.
A 20-year-old with no major debt, has excellent control of their emotions, and has strong investment knowledge is in a good position to start investing. On the other hand, It may be too early to start investing for a 30-year-old who still needs to organize their personal finances and is prone to succumbing to their emotions.
With that in mind, the expected follow-up question would be “When is an investor considered ‘ready’ to start?”
Investors won’t know with absolute certainty when they’re ready to start: this largely comes down to a judgment call and a leap of faith. If prospective investors wait for the “perfect” opportunity to start they’ll spend their entire lives waiting because such a thing doesn’t exist.
However, in the context of what we’ve discussed, prospective investors need to understand that they shouldn’t feel rushed to start their careers. Despite the constant pressure to start investing as early as possible, prospective investors aren’t required to follow this largely poor advice.
Wrapping Up
Some prospective investors are obsessed with the idea of investing as soon as they can. In many cases, getting an early start to investing can be very advantageous, but starting as early as possible may not be the best decision for everyone.
Why is that? Because not every prospective investor is in a position to start their career as soon as possible. There are various legitimate reasons why investors-to-be may want to hold off for now.
Starting an investment career as early as possible without being adequately ready will most certainly end in disaster, negating any benefits that come with starting an endeavour early.
