For years, we have been counseling young people about the tremendous power of compounding. We have met with teenagers in our Front Street Capital office, we have lectured in high schools and in college classes, and we have hosted small groups of kids as young as grade-schoolers and middle-schoolers, all to help kids learn about how long-term, low-cost, monthly investing with very small amounts of capital can set them up for a lifetime of financial security without hassle, worry, or confusion.
Here is a short video in which we try to summarize those lessons. It is designed for people just getting started with investing. But the investing principles are no different for our longest-term clients. The people who have built a lot of wealth through the investment process know how important it is not to interrupt the process. The payoff gets bigger the longer you wait.
Why is this so important for young people? Because they have an enormous advantage: time. The benefits of compounding accumulate slowly at the beginning, but they add up more and more quickly the longer one remains invested. Kids have a many-decades-long investment horizon, so their opportunity to compound wealth over their lifetime is extraordinary.
And kids have another advantage. The idea of leaving your account alone to compound for decades is the antithesis of the financial planning and services industry, which requires action, activity, strategy-shifting, and money movement so they can charge fees and prove they know more than you and thus deserve the fees you pay them. But kids are thankfully sheltered from the calls of financial planners and social media algorithms that feed an endless stream of financial influencers. Rather, the algorithms target kids with different (albeit sometimes potentially problematic) online content like dance videos, online challenges, and fashion content, which could be the subject of a different rant. But because young people don’t typically face pressure from the financial services industry to derail their compounding, they have another massive advantage.
In our presentations to high schoolers, we often challenge them to predict who will end up with more compounded wealth: (a) a middle aged professional like me, who allocates a large amount of investment capital for retirement, or (b) a high school kid who passively invests a small amount of money each month for the rest of their working lifetime. They are always amazed to find out that they are going to beat me by a landslide.
Feel free to share this with the young people in your life – and spend 5 minutes to watch it yourself – and encourage them to take part in the life-changing experience of long-term compounding! As noted in the video, a simple compound calculator can be found here.
