This is the kind of longer conversation that investors should really have with their financial advisors, of course. But broadly speaking, for younger investors the old advice is still sensible: Start saving as early as you can and don’t stop. Diversify, diversify, diversify. Keep costs low and be tax savvy in where you place your investments.
Market Realist – Start investing early to reap long-term benefits
The above graph shows how beneficial it is to start investing early. In the first scenario, a person is 25 years old, invests in equities (SPY)(IVV) for 30 years, and invests $100 per month. Assuming 5% CAGR (compounded average growth rate), which is conservative, that person will receive a sum close to $83,000, assuming monthly compounding. This example excludes dividends.
In the second scenario, the person is 35 years old and hence invests for only 20 years. If all other assumptions are the same as scenario one, that person will receive only about $41,000.
In the third scenario, all other assumptions are the same as scenario two except the person invests a little more, or $150 per month. Even though this is $50 per month more than the first person, it will yield only ~$61,500 because that person started late and hence invested for a smaller period of time.
This proves that it’s beneficial to start investing early. The longer the period you invest, the higher the returns will be exponentially. If dividends were included and reinvested, the gap would be wider.
Keeping your money under the mattress—figuratively or literally—is not the road to a comfortable retirement.
Market Realist –
Please read our series Are minimum volatility funds like bowling with bumpers? for more on equities.