Following his recent triumph at the 2020 Australian Open, world number one Novak Djokovic was asked if he had any advice for the next generation of tennis players.
Amongst other encouragements, he explained that setting clear milestones and a "higher goal" was a key driving force and is what consistently motivates him to succeed.
It might sound simple but it sure is effective; a sturdy mix of goal setting, hard work and discipline has helped earn Djokovic 17 grand slam titles and counting.
While perhaps we aren't all predisposed to record-breaking international tennis fame, Djokovic's advice does however also ring true for the next generation of investors.
Creating clear, appropriate investment goals from a young age will reveal enormous benefits later in life, whether that means financial security or having the means to support the lifestyle you want.
It's understandable that at 20, you perhaps have priorities more exciting than acing your finances, but here's a few good reasons to consider doing so.
Time is money
The power of compound interest is hard to ignore once you understand it. According to Albert Einstein, the concept is so astonishing that he proclaimed it to be the eighth wonder of the world.
It is also well-suited to younger investors with time on your side, as the key element to using compound interest to grow your wealth is having time on your side.
Let's take for example two investors who are aged 20 and 25 respectively. They both have $5,000 to invest in a managed fund that returns 8 per cent a year, and are looking to make an ongoing monthly contribution of $200.
Fast-forward 10 years, the investor who started at 20 now has $45,562 while the then 25 year old has $21,426. That is the penalty for starting five years later.
By the time they each turn 70 years old, there is now more than a $524,000 difference in their wealth. The gap is vast.
The table below illustrates this compounding effect:
Of course, the example given assumes that the managed fund consistently returns 8 per cent per year and that the contribution amount stays the same.
While these factors will inevitably vary in real life, the principle remains the same; the earlier you start investing to grow your wealth, the greater chance you give yourself of capturing the benefits of compound returns.
Money doesn't grow on trees, but perhaps compound interest is the next best thing.
Now is better than before
According to Vanguard's latest quarterly ETF report, the Australian ETF market experienced record inflows in 2019 and has now surpassed A$61b in assets under management. It is hard to imagine that 20 years ago, ETFs did not exist in Australia.
As ETFs become more and more popular with investors, the number of ETFs offered on the ASX – currently sitting at almost 200 - and the diversity of the indexes they track is likely to expand too.
With the number of investment products out there at the moment, investors have a better chance than they did even a year or two ago at finding one that suits their purpose and preference.
For instance, for the growing number of investors who are passionate about sustainable investing, finding an ethically conscious ETF that excludes exposure to companies with significant interests in non-renewable energy, vice products and weapons is now easier than ever. Technological advancements in the financial industry over the last decade have also made it much easier to invest.
Younger investors are "digital natives" and both understand and expect things to be done through apps on their smartphone or computer. ETFs have played their part by effectively "democratising" investing by making broad markets much more accessible at low costs.
With the benefits of compound returns awaiting, and the ever-expanding range of investment options on offer, perhaps the best time to start investing is today.
Robin Bowerman, Vanguard