The Benefits of Investing Early in Life
“Time in the market beats timing the market.”
This quote by Ken Fisher, founder of Fisher Investments, speaks to the often-overlooked benefits of long-term investing.
Timing the market for the perfect trade can be a tricky and potentially dangerous proposition—even for the most seasoned investors. That’s why the buy and hold strategy has been a popular investment tactic among many successful investors like Warren Buffett and Jack Bogle.
And thanks to the power of compound interest, it’s important to start as early as possible. This animated graphic by Sjoerd Tilmans shows the benefits of investing early on in life, and just how much of your total earnings can come from your early years.
Compound Interest
The reason that investing early is so beneficial is because of compound interest. Simply put, compound interest is the phenomenon of earning interest on interest.
For instance, let’s say you make an initial deposit of $1,000 in an account that returns 10% annually. By the end of the year, you’ll earn $100 in interest. In the following year, with your total now at $1,100 and assuming the same rate of return, you’ll earn $110 in interest.
And these annual gains, while starting off small, add up significantly over time.
What If I Double Down When I Have More Money?
What happens when you wait to invest?
Though you should only invest money that you don’t need access to in the short term, the reality is that waiting will have consequences on your long-term gains.
For example, let’s say you started investing at 20 years old, and you invest $250 each month with an 8% annual rate of return. By the time you reach 65, over 50% of your total portfolio would have come from money that you invested in your 20s.
Someone who invests a decade later than their peer with double the amount will see actually see lower returns in the long run. For a more thorough breakdown, check out this infographic that goes into detail about the power of compound interest.
Long-Term Investing is Declining
Despite the benefits of long-term investing, it seems that many investors these days are opting for shorter holding periods and quick gains over long-term growth.
For instance, according to the NYSE, the average holding period for stocks in the late 1950s was 8 years. By June 2020, the average holding period had dropped to 5.5 months.
That being said, recent interest rate hikes and threats of a recession could lead to a major slowdown. While quick-win investing has been trending in recent years, we may very well see long-term investment strategies regain some footing.
