The Roaring 20S: Investment Trends

The 1920s, also known as the Roaring Twenties, was a period of economic prosperity in the United States. The stock market experienced a period of unprecedented growth, with millions of Americans investing for the first time. This was largely due to the increase in industrial production and the rise of consumerism.

The introduction of new technologies and production methods, such as the assembly line, led to an increase in efficiency and productivity, resulting in higher profits for businesses. The growth of the automobile industry, in particular, played a significant role in the economic boom.

Additionally, consumers began purchasing vehicles, household appliances, and other goods, driving the demand for consumer goods. The availability of credit also made it easier for people to purchase goods and services, further fuelling the economy.

The media portrayed the stock market as a symbol of financial success, and many Americans believed that investing was the key to achieving their financial goals. This, coupled with the ease of access to credit and the lack of government regulations on the stock market, led to speculation and overconfidence among investors.

However, the stock market crash of 1929 wiped out a massive chunk of America's GDP and ultimately led to the Great Depression.

Compounding

For example, a single $10,000 investment at age 20 can grow to over $70,000 by the time you turn 60, assuming a 5% interest rate. The same investment made at age 30 would yield only about $43,000 by age 60, and if you started at age 40, you'd end up with just $26,000. This illustrates the power of time and compounding—the longer your money is invested, the more it can grow.

Starting to invest in your 20s also allows you to take advantage of compound interest, which is interest earned on both your initial investment and the accumulated interest from previous periods. Compound interest can have a significant impact on your investment portfolio, especially over several decades. The earlier you begin investing, the more time your investments have to benefit from compound interest.

Another benefit of investing in your 20s is that you can afford to take on more risk. Young investors have the time to ride out market fluctuations and can build more aggressive portfolios that can produce larger gains over time. Additionally, investing earlier gives you the flexibility to study the markets, refine your investment strategies, and learn from your successes and failures.

When it comes to specific investment options, contributing to a workplace retirement plan, such as a 401(k), is a great way to start investing in your 20s. Many employers offer matching contributions, which can boost your savings even further. If you don't have access to a 401(k), consider opening an individual retirement account (IRA), such as a Roth IRA, which offers tax advantages.

To diversify your portfolio, you can invest in low-cost index funds or exchange-traded funds (ETFs) that track a particular stock market index, such as the S&P 500. These funds allow you to invest in a basket of stocks with a single purchase, providing instant diversification at a low cost.

Remember, investing in your 20s is a marathon, not a sprint. Start with a small and consistent contribution, and gradually increase your savings rate over time, especially when you get raises or promotions. The key is to start early, embrace compound interest, and let time work its magic on your investments.

Risk tolerance

For example, a $10,000 investment at age 20 would grow to over $70,000 by the time the investor turned 60 (based on a 5% interest rate). The same investment made at age 30 would yield about $43,000 by age 60, and at age 40, it would only yield $26,000.

Younger investors can also take advantage of compound interest, which is interest earned on interest. This allows investments to grow exponentially over time. For instance, if someone invested $2,000 a year from age 19 to 27 and didn't save anything after that, assuming a 10% average rate of return, they would end up with $1 million by age 65.

However, it's important to note that investing in stocks or riskier assets is not without potential drawbacks. While historically stocks have been a rewarding investment, they can be riskier than other options, such as putting money in a savings account. In the short term, there may be drops in the market, so it's generally not advisable to invest in stocks if you need the money within five to ten years.

Bonds are often considered a lower-risk, lower-return investment option that can counterbalance the risk of stocks. Additionally, investors should consider diversifying their portfolios to smooth out their investment journey and make it more likely that they can stick to their plan.

Robo-advisors and financial advisors can also provide valuable guidance and help investors manage their risk tolerance by creating a buffer against potential mistakes.

Tax-advantaged retirement plans

Tax-Deferred Accounts

Tax-deferred accounts allow you to realise immediate tax deductions on the full amount of your contribution. However, future withdrawals from these accounts will be taxed at your ordinary income rate. Examples of tax-deferred accounts include Traditional Individual Retirement Accounts (IRAs) and 401(k) plans in the US, and Registered Retirement Savings Plans (RRSPs) in Canada. With a tax-deferred account, you pay taxes on the gains when you withdraw the funds during retirement.

Tax-Exempt Accounts

Tax-exempt accounts, on the other hand, provide future tax benefits as withdrawals are not subject to taxes. Since contributions are made with after-tax dollars, there is no immediate tax advantage. Popular tax-exempt accounts include the Roth IRA and Roth 401(k) in the US, and the Tax-Free Savings Account (TFSA) in Canada. With a tax-exempt account, investment returns grow tax-free.

Other Tax-Advantaged Retirement Plans

In addition to IRAs and 401(k)s, there are several other tax-advantaged retirement plans available. These include:

• 403(b) plans: Similar to 401(k) plans but offered by public schools, charities, and some churches.
• 457(b) plans: Available to state and local government employees, these plans allow tax-free growth of contributions until retirement.
• Spousal IRAs: Allow the spouse of a worker with earned income to contribute to an IRA, even if they don't have their own earned income.
• Rollover IRAs: Created by moving a retirement account, such as a 401(k) or IRA, to a new IRA account.
• SEP IRAs: Designed for small business owners and their employees, with higher contribution limits than traditional IRAs.
• SIMPLE IRAs: Offered to employees of small businesses and start-ups, these plans provide the same benefits to all employees, regardless of their compensation level.
• Solo 401(k) plans: Designed for business owners and their spouses, allowing higher contribution limits and the option of a Roth version.
• Health Savings Accounts (HSAs): Offer pre-tax contributions and tax-exempt growth if distributions are used for qualified health care expenses.
• 529 plans: Tax-advantaged savings plans that can be used for college or other qualifying educational expenses.

By utilising these tax-advantaged retirement plans, individuals can maximise their savings while minimising their tax liability.

Robo-advisors

Some of the best robo-advisors include:

• Wealthfront: Best Overall, Best for Goal Planning, Best for Portfolio Management, and Best for Portfolio Construction
• Betterment: Best for Beginners and Best for Cash Management
• Merrill Guided Investing: Best for Education
• M1 Finance: Best for Low Costs, Best for Sophisticated Investors, and Best for SRI
• ETRADE: Best for Mobile

Savings rates

Savings accounts were not a common way for people to invest their money in the 1920s. In fact, they were not popular among the general public until that decade. Before the 1920s, people in India primarily relied on fixed deposits to preserve their savings. However, in 1920, Canara Bank (formerly known as Canara Banking Corporation Limited) introduced the concept of a savings account with a set of rigid rules. Customers could deposit a minimum of ₹1 and a maximum of ₹1000. They were not allowed to carry a balance of over ₹2000 and had to give three days' notice to the bank before withdrawing their money.

In the United States, savings rates were not regulated until the 1930s. The Emergency Banking Act of 1933 closed all banks in the country until new legislation could be passed to stabilise the banking system. The Federal Deposit Insurance Corporation (FDIC) was also created in 1933 to insure deposits in commercial banks, and the Federal Savings and Loan Insurance Corporation (FSLIC) was established in 1934 to insure deposits in savings and loans.

Frequently asked questions