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    Start Investing Early

    By Epeng | May 29, 2007

    When it comes to saving and investing, you might think that the most important thing to do is make the best investment choice and you will have the best chance to achieve success and to grow your money the fastest. Even though investment choice is highly correlated to how your investment performs, there is something more important that determines how much your investment will be worth many years from now. “When” you decide to start saving and investing is the most critical decision in determining how much your portfolio will grow.

    Here is a simple example to prove my point. An investor starts saving and investing $300 a month for 10 years and stops with a total amount invested of $36,000. Now compare this to an investor who waits 10 years and puts away $300 a month for the next 30 years for a total investment of $108,000. Let’s say they both invest in the stock market and earn a conservative 8% compounded return, which is very possible since the historical average return for a diversified investment in the stock market is close to 11%.

    As you can see from the chart below, the value of the late investor’s portfolio never catches up to the value of the early investor’s portfolio even though the later investor actually put away more money. This demonstrates the value of compounding returns and starting early. If the compounded return we used were higher – something closer to the 11% historical return of the stock market – the difference between the early investor and later investor would be even greater. The other lesson to take away from this chart is how large a small investment can become by starting early and being patient. $300 a month for 10 years can become $1,000,000 or more in 20 years.

    So, it is important to make the right investment choices, but it is event more important to start investing early. Like most investors, once you are invested, you do not have much control on how your investment performs. Historically, the market has gone up, but we all know past performance does not guarantee future returns. The one thing you can control that certainly helps your portfolio grow faster is to start as early as possible. In fact, right now sounds like a good time to start.

    Value of Investing Early

    The early saver deposits $300 a month for 10 years. Total invested: $36,000.
    The late saver waits 10 years then begins to deposit $300 a month for 30 years. Total invested: $108,000.

    Assumes an 8% compounded interest rate. This example is for illustrative purposes only and does not reflect the performance of any particular investment.

    A systematic investment plan does not ensure a profit and does not protect against loss in declining markets. Such a plan involves continuous investment in securities regardless of fluctuating price levels of such securities; therefore, the investor should consider his or her financial ability to continue purchases through periods of low price levels.

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    Topics: Personal Finance | No Comments »