Invest Now & Often
- Harrison Hodges
- Mar 2, 2021
- 6 min read
Updated: Apr 28, 2021
A blog post from the unique mind of Harrison Hodges.
Invest Now and Often
I’ve mentioned in other posts that once people know what my career is, I often get the question: “How do I start investing?”. It’s always great to hear this because I know that someone who asks me that question is right on the cusp of a breakthrough.
There are steps you must take to organize your financial situation and optimize it, but none of it matters if you don’t take the first step of committing to investing! While there is no such thing as a guarantee, history has shown that those who invest early and often typically end up in a far better financial situation than those who don’t.
To be clear: It’s NEVER too late to get started. But statistically speaking it literally pays off the sooner you do. Why is that the case?
One of the primary reasons is the compounding effect. Let’s break it down. If you start with a $1000 investment and your investment grows 10 percent in a year, you now have $1100 in that investment. Let’s say it’s doing great, and it grows 10 percent again the next year. You now have $1210. So, in year one you made 100 dollars on 10 percent growth. In year two you made 110 dollars on the same percentage return. If you keep that investment for 20 years and it averages 10 percent growth per year you could see that initial investment grow into a nice chunk of money!
10 percent is a relatively high rate of return. For context, according to Investopedia the S&P 500 returned about 10% per year on average between 1926-2018*. I found an example of how effective compounding is with a much more modest rate of return. AMG ran a hypothetical scenario where a 25 and a 35-year-old both invested a lump sum of 15k at the same time, and compared their investment’s growth at age 50 with a 5.5% annually compounded rate of return. The person who started at 25 ended up with about 57k at age 50 (25-year investing period), while the person who started at 35 ended up with about 33k (15-year investing period)*.
Not bad either way, but it’s clear that the extra decade for the 25-year-old makes a huge difference in the amount of growth they achieve over time. These examples are meant to demonstrate how important TIME is. They don’t even factor in the complexities such as risk. If you start investing at an older age, you’ll probably have to be more aggressive than you should be. This is because you’re playing catch-up on growth so that you can retire comfortably, pay for your kids’ college, etc. You can better avoid such scenarios by investing early.
You may be asking: what if I only have a small amount of money to invest? What if I have none right now and I’m literally starting from scratch? That’s perfectly fine. We are living in an era of unforeseen accessibility to investing. What’s usually missing is direction. I’ll talk more about that later.
For now, I want to illustrate how powerful putting away even a small chunk of money per month can be. I’m 30 years old now. We all know that one night out, a nice dinner, or a regrettable food delivery order could easily cost 50-100 bucks, maybe more depending on how many drinks you can have!
What if you set aside 50 bucks a month and invested that money over a long period of time? Luckily for us, Thrivent Funds did the math: $50 a month compounded at a 10 percent annual rate of return would grow into 10k over 10 years (6k of contributions, 4k of growth), 36k over 20 years (12k contributions, 24k growth), 104k over 30 years (18k contributions, 86k growth), and 280k over 40 years (24k contributions, 256k growth)*! Truly incredible stuff.
Don’t get me wrong, I’m not one of those “if you didn’t get avocado toast you could afford things” kind of people. I think it’s important to enjoy your life, and I understand there are challenges that make setting aside money difficult. But if you are able to spare 50 bucks a month you probably won’t even notice it’s gone, and as the above study shows it can have a huge impact on your finances.
What if you’re older and wondering if now is a good time to enter the market? Maybe you’ve been on the sidelines for a while and are afraid the market is at a top. I’ve gotten questions about that often over my career, usually something along the lines of “Should I wait until the market drops?” Or my more self-directed clients would simply state they would not invest until the market drops. Do they know when that will happen? More importantly, do I know when that will happen? Will they, or I, know when we reach bottom in an upcoming correction or bear market? Of course not.
Timing the market is incredibly difficult. Interest rate environments have not been favorable to those who stay on the sidelines over the past couple of decades, especially the past 12 years. While it is important to not risk your emergency or short-term money, studies show that those who immediately invest what they are able to invest generally fare much better than those who try to time the market or sit on the sidelines. A study from the Charles Schwab Center for Financial Research conducted in 2013 examined hypothetical scenarios for participants who invested $2k per year over a 20 year period (1993-2013). What they found was even the person who invested at the WORST possible time every year (the market peak) still ended up with 20k more than the person who stayed in cash/money market investments and never got invested (72k vs 51k). The person who invested 2k per year every year as soon as they got it ended up with about 30k more than the one who stayed in cash*.
The bottom-line regarding timing: waiting for a minor correction/entry point is a very risky game, and a game most people end up losing. History has shown that if you’re investing for the long haul you can ride out the bumps and dips.
A Motley Fool article from September 2020 states that the average Social Security benefit is currently about $1500 a month*. Many of us have seen our parents or loved ones struggle with making ends meet and being able to retire, and the trend is that things may be even more difficult for us when our time comes. While we may still have Social Security for our retirement it is certainly not what anyone would want to completely rely upon in our later years. Maybe our parents are becoming, or will become, more financially dependent on us, especially if they need assisted living care when they get older. Many of us are struggling with student loans and want to one day be able to send our kids to college without having to take on a similar burden.
These are common issues almost all of us may face or are already facing. The best thing we can do for ourselves is prepare, and one of the best ways to do so is by investing our money prudently. Saving and investing are crucial no matter where you’re at. The above data and studies show that investing now and often (with what you can spare) historically pays huge dividends. As I said earlier there are no guarantees in investing, but you can take steps to put yourself in the best possible position to handle future challenges and achieve your goals.
There are a couple of scenarios in which I would not recommend investing (yet). If you do not have an emergency fund (about 6 months’ worth of living expenses), or if you carry any high-interest debt (credit cards, personal loans, etc.) you should focus on those items first. Pay off that high interest debt, build up your emergency savings, and after that you can start focusing on investing.
With all this being said, it’s important to align your investments with your risk tolerance and your time horizon. Invest in a tax-efficient manner. If you’re not sure about what this should look like, I would highly recommend speaking with a financial advisor. Depending on what they specialize in they can assist with everything from getting you organized financially, to determining what your ideal investment mix should look like, to managing your portfolio, and more. See our post regarding choosing a financial advisor for guidance on where to get answers.
The future performance of an investment or strategy cannot be deduced from past performance. As with any investment or investment strategy, the outcome depends upon many factors including: investment objectives, income, net worth, tax bracket, risk tolerance, as well as economic and market factors. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor. All information contained in this presentation has been derived from sources deemed to be reliable but cannot be guaranteed. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index.
References (in order they appear)
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