Andrew Ross Sorkin
For many beginners, the idea of investing can feel overwhelming. The stock market, with its unpredictable highs and lows, often seems like a playground for professionals rather than newcomers. Yet avoiding it altogether might be one of the biggest mistakes young investors make.
A recent survey by Bankrate revealed that 21 percent of Americans shy away from stocks because they find the market too intimidating. The hesitation is even more pronounced among younger generations — nearly 29 percent of Gen Z and 24 percent of millennials admitted they avoid investing in stocks for this reason.
At first glance, parking money in cash or bonds might feel like the safer path. After all, they appear stable and less prone to dramatic swings. However, financial experts argue that this strategy may actually increase long-term financial risk rather than reduce it.
Josh Brown, CEO of Ritholtz Wealth Management, put it simply: “When you’re young, worrying more about potential losses than potential gains is probably the biggest mistake. You need to build wealth before you can focus on preserving it.”
Brown emphasizes that younger investors shouldn’t be overly concerned with conservative investments like bonds or large cash positions. Instead, he believes they should focus primarily on stocks — the asset class that historically offers the best long-term growth.
Time Is the Greatest Asset for Young Investors
The idea that stocks can be the safer choice for young investors might sound counterintuitive. After all, stocks are known for volatility, while bonds and cash are associated with stability. But when the goal is long-term financial growth, time changes the equation completely.
Over extended periods, stocks have consistently outperformed both cash and bonds. This performance difference becomes even more critical when accounting for inflation, which steadily erodes the purchasing power of money left sitting idle.
Data compiled by Aswath Damodaran, a finance professor at New York University, shows that the S&P 500 — an index representing the largest U.S. companies — has delivered an average annual return of nearly 12 percent since 1928, including dividends. In contrast, 10-year U.S. Treasury bonds have averaged around 5 percent, and corporate bonds about 7 percent over the same timeframe.
This means investors who start early and remain consistent in the stock market not only have a better chance to grow their wealth but also to outpace inflation’s silent impact.
Another crucial advantage young investors possess is time itself — the ability to let investments compound. Compound interest, often called the eighth wonder of the world, allows gains to generate more gains over decades. Even small, regular investments made early in life can grow into substantial wealth later on.
“When you’re young, you have something every professional investor wishes for — more time,” Brown said. “Once you understand the power of compounding, you realize that what seems like risk in the short term is actually security in the long term.”
Building a Stock Portfolio the Smart Way
Knowing that stocks offer higher long-term returns is one thing — but how to invest in them effectively is another. The key isn’t just buying stocks; it’s buying them in a way that minimizes risk and maximizes potential growth.
Financial experts often recommend that beginners avoid trying to pick individual companies. While it can be tempting to chase the next big tech winner or follow stock tips online, this strategy often backfires. A single company’s poor performance can hurt your overall returns, and most people lack the resources and time to consistently identify outperforming stocks.
A better approach for most young investors is to use index funds or exchange-traded funds (ETFs). These funds track major stock indexes like the S&P 500 or the total U.S. market, offering broad diversification at a low cost. By investing in hundreds or even thousands of companies through a single fund, investors reduce their exposure to any one company’s failure.
Index funds have another significant advantage: they consistently outperform most actively managed funds over long periods. That’s because they avoid high management fees and human error while capturing the overall market’s average return — which, historically, has been quite strong.
“If you’re managing your own investments, start with index mutual funds or ETFs,” Brown advised. “Until you’ve built a sizable portfolio, there’s no need to chase complicated or high-cost strategies.”
For beginners, a total market index fund is often the simplest and most effective choice. Christine Benz, director of personal finance and retirement planning at Morningstar, suggests funds like the Vanguard Total World Stock ETF (VT), which offers exposure to both U.S. and international stocks. She describes it as a “one-and-done” solution — ideal for young investors who want simplicity and diversification.
Considering Balanced and Target-Date Funds
While all-stock portfolios can yield higher long-term returns, some investors prefer a more balanced approach. Balanced funds maintain a fixed mix of stocks and bonds, offering both growth potential and stability. For example, a 70/30 fund might keep 70 percent of assets in stocks and 30 percent in bonds, regardless of market fluctuations.
Another popular choice is the target-date fund, which automatically adjusts its mix of investments as the investor approaches retirement. When investors are young, these funds hold more stocks for growth. As retirement nears, they gradually shift toward bonds and cash to reduce volatility.
This automated rebalancing can be a great option for investors who want a “set it and forget it” approach, removing the emotional decisions that often derail long-term investment plans.
Choosing the Right Type of Account
Even the best investment strategy can be less effective if the money is placed in the wrong type of account. Financial advisors recommend considering tax efficiency when deciding where to hold investments.
For instance, tax-advantaged retirement accounts such as 401(k)s or IRAs are ideal for long-term holdings like index funds or target-date funds. These accounts allow investments to grow tax-deferred — or, in the case of Roth IRAs, tax-free — providing more powerful compounding over time.
On the other hand, taxable brokerage accounts are more flexible since funds can be withdrawn at any time. However, they can also trigger capital gains taxes when investors sell their holdings or receive dividends. That’s why many advisors suggest keeping long-term, tax-efficient funds in retirement accounts and using taxable accounts for shorter-term goals or liquid investments.
Overcoming the Fear of Investing
The fear of losing money is a powerful emotion, especially for first-time investors. Market downturns can be nerve-wracking, and headlines about stock volatility often make people want to retreat to cash. Yet history shows that staying invested, even during turbulent times, is the surest way to build wealth.
The stock market has weathered wars, recessions, and political turmoil — yet over time, it has always recovered and reached new highs. Investors who panic and sell when markets fall often lock in their losses and miss the recovery that follows.
Experts suggest that young investors take a long-term perspective. Rather than trying to time the market, focus on time in the market. Regularly contributing to your investments, even in small amounts, can smooth out short-term volatility and build financial stability over decades.
The Bottom Line
For young investors, the greatest financial advantage isn’t luck or timing — it’s time itself. By starting early, focusing on stocks, and maintaining a disciplined, long-term approach, it’s possible to turn even modest savings into significant wealth.
Avoiding the stock market out of fear might feel safe today, but in the long run, it can mean missing out on the most effective tool for building financial independence. As Josh Brown reminds us, “You have to build wealth before you can protect it.” The earlier you start, the greater your opportunity to let compounding — and time — do the heavy lifting.
