Even if you think it might be tough to afford or you can’t scrape up enough for it to matter, now’s the time to get started.
After more than 20 years of professional experience in the investing business, it only makes sense that I have some wisdom to pass along to investors. Most of it is rooted in simple (and often repeated) observation, while the rest I learned the hard way.
If I was able to offer only one suggestion, though, it would be this: Start building your portfolio as early as you can, even if it’s a financial strain to do so. Starting with a few hundred bucks is still better than nothing.
Because in this game, time is your strongest ally. The high cost of waiting
Don’t misunderstand. The other investing tips you so often hear are also valuable. These include keeping it simple, starting with index funds, erring on the side of leaving your positions alone, and not trying to time your entries and exits. The one mistake that can cost you the most, though, is postponing getting serious about investing in stocks.
And there’s plenty of math to back me up. A comparison of three hypothetical investors, however, is the easiest way to explain it.
Let’s start with Linda, who is 55. Her experience has earned her a good-paying job as a marketing manager for a car dealership. Although she now earns about $80,000 per year, Linda didn’t start socking money away for retirement until she got her job with the dealership five years ago. Since then, she’s been putting $7,000 into her company’s 401(k) every year, and her employer usually chips in another $1,000 per year to bring the annual contribution up to $8,000. She enjoys her job, but Linda is also hoping to retire when she’s 65 years old. How much will she have then, assuming she’s investing in an S&P 500 index fund — and reinvesting her earnings — and getting an average 10% annual return on her investments? Her $120,000 worth of contributions spaced out over 15 years would be worth something on the order of $280,000 at the end. Not bad, but certainly not a figure that enables an unbudgeted lifestyle, even after Social Security income is added to the mix.
Frank’s situation is dramatically different. His passion is painting, and as a full-time artist, he’s sure he’ll be able to sell about $30,000 worth of paintings every year. He also knows he’ll be able to tuck away only about $3,000 of that annually in an IRA, but he intends to start saving early and will work as long as he can, perhaps until he’s 70 years old. If he’s earning the same 10% per year on an S&P 500 index fund, how much might Frank have after a 45-year career as a professional artist? Incredibly, despite contributing only $135,000 over his career, Frank should be sitting on a retirement nest egg of nearly $2.4 million.
Though Linda and Frank contribute similar amounts to their savings, the big difference between their final figures is that Frank’s savings reflect the benefit of an extra three decades, which enables his portfolio to generate more and more growth on previously achieved returns. Half the value of Frank’s retirement portfolio doesn’t materialize until the last eight years of the 45-year span.
You don’t need to invest a ton of money every single year between now and your retirement date to build a sizable nest egg.
Take Sally as an example. Sally earned good money right out of college, taking home $100,000 while in her mid-20s. Of that, between her Roth IRA and her employer’s retirement benefits, Sally was able to put $10,000 into the market every year for the past 20 years. Now, at age 45, she’s looking to make a major lifestyle change and do some writing while she travels the world. She thinks she’ll be able to earn about $25,000 per year doing it, which will leave nothing extra to save for retirement when she’s ready to call it quits at 65. How much will she have then, again assuming she earns an average of 10% per year on her investments? Amazingly enough, Sally should have something on the order of $4.2 million.
Once again, the bulk of the growth took shape in just the last few years of the time frame in question.
For perspective, even if Sally had socked away only $5,000 per year between the ages of 25 and 45 before becoming a traveling writer, she’d still have access […]
source I’ll Share This Investing Tip Until I’m Blue in the Face
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