Starting your investments journey can be daunting. Is now the right time? What if you lose money? You might have even read somewhere that markets are at a high, surely that means you need to wait for a correction? I can do it when I’m older and have more money you might say. In our previous post we made the case for investing consistently and for the long term in order to achieve your investment goals. In fact, as the numbers prove, being in the market for longer tends to benefit not hinder your chances of success.
A study by JP Morgan found that from 31 January to December 2014 the US stock market’s average return was 9.85%. However If you had missed the 10 best trading days (you were not invested therefore) your return was only 6.10%. The 20 best trading days (not even a month) your returns dropped to 3.62%. The 60 best trading days your portfolio would have lost -3.84%! So if you don’t want to be out of the market when should you start investing and does it really matter if you invest over 10 or 15 years?
When asked to name the greatest invention in human history, Albert Einstein simply replied “compound interest.”
Let’s take the example of three young professionals. Each deciding to contribute £5,000 into an investment portfolio on a yearly basis. Cindy, invests 5,000 pounds a year from the first year she starts work and does so until the age of 35 then stops. Susan decides she would rather spend that money right now because she is young, wants nice things and enjoys travelling. She realises that investing is important later in her career so starts investing 5,000 a year from the age of 40. Given her new found wisdom however she prudently puts away £ 5,000 for the next 25 years until her retirement. Kathy on the other hand invest £5,000 from her first year of work until her retirement. Below are the results of their investments if we assume an annualised 5% return in their portfolios.
Perhaps without any surprise Kathy’s portfolio over the 41 years amounts to £639K.
Interestingly, despite Susan contributing £5,000 for 26 years compared to Cindy’s mere 10. It is Cindy that ends up with £307K vs Susan’s £256K. How can this be? The mere fact that Cindy started early means that her portfolio could compound and grow over a longer time period and result in a far greater final amount.
|Expected total amount||£639,000||£307,000||£256,000|
If we apply this logic to practical matters, how much do you think you need for retirement and how can starting to save and invest early help you get there? If we make a very simple assumption that you want to retire and live on the annual national UK average income of £25,000 from the age of 65 to 95. You will need £384K on the day you retire assuming an annual average portfolio return of 5%. This would require an annual investment of £2,406 if you start at the age of 20 but almost double the amount to £4,254.98 at the age of 30. The idea of starting to invest in your 20s might be ridiculous to most people, however it can have a dramatic impact in how you will spend your later years and the sacrifices you will have to make in your 30s and 40s.
If we have wanted to convey one clear point in this article it is that the longer you invest for the more your money works for you and the greater your chances are of reaching your financial goals. At ETFmatic we are absolutely committed to help our clients start as early as possible and invest for the long term. That is why we have zero investment management fees for children under the age of 18. It is also why we have one of the lowest minimums in the industry of just GBP/USD/EUR 100. Ensuring that anyone can start their investment journey with us.
If we have zero management fees for kids our next aim is to help the next age cohort, university students, start their investment journey. It is with this in mind that we are launching our latest campaign.
Anyone opening an ETFmatic account and funding it with a university email address from the 19th of May to the 22nd of June will receive 6 months of free investment management fees.