If you are sure that you want to start investing but are not aware of when to start or when the right time to start investing is, let this blog guide you. Studies have shown that the earlier you invest, the better it is. So the ideal time to invest would be right now. Read more to know why.
Before beginning, we would like to introduce you to the concept of Compound interest to understand the role it plays in long term investing. Compound interest is basically earning interest on interest which will make the total sum grow faster than simple interest. To give you an example:
If you had invested Rs. 100 at an interest rate of 10%, then the Compound interest would earn you:
Rs 10 (10% * 100) in the 1st year.
Rs 11 [(10% * 100 + 10% * 10)] in the 2nd year.
Rs 12.1[(10% * 100) + (10% * 10) + (10% * 11)] in the 3rd year.
Whereas in case of simple interest it would only earn you Rs 10 (10% * 100) for all the three years.
This concept plays on a much bigger scale when looking at 5, 10, 15 years or even more which is precisely why you should start investing as early as possible due to the longer time horizon. Your first goal in investing should be to earn more than the inflation rate and beating inflation requires you to invest in risky securities like Equity. Studies over the past several years have shown that Equities has been the best performing asset class. However, daily volatility of prices could worry a lot of beginners if not the experienced ones. However, on a long term basis, equities have tended to be on the positive side beating inflation. Having a long term horizon when investing in risky securities does help considerably and hence investing early will be beneficial in addition to the following benefits:
- More time to recover from any losses compared to an investor who starts at a later stage in life. Since equities or any risky security carry the risk of a downside, an investor should be cautious regarding which securities he chooses to invest in. However, there can never be any guarantee regarding capital protection. Starting early means if there is a loss, the investor has more time to recover from those compared to an investor who starts late.
- When starting early, you develop a discipline towards savings and investments which will stay with you for the rest of your life. Youngsters have the habit of spending on luxurious goods as soon as they get some money in hand. Investing early means that they have to save some money automatically reducing expenses on unnecessary items. Regular investing will make them disciplined from a very young age and discipline is the one thing that separates the best investors from the rest.
- Early investing lets you pick risky companies which could grow exponentially rather than sticking to safer or low return options. Such a strategy allows many people to achieve financial independence at a young age and take early retirement.
- If you start investing in your 20’s means that by the time you turn 50, you would have invested a considerable amount which coupled with the Power of Compounding, will have turned into a huge sum. This sum can be used to spend during retirement. Every new generation retiring is more active than the previous ones. Retirees generally prefer to travel or start a new hobby or any other interest. These activities require more spending. Also, retirement is getting expensive due to inflation, and the advancement of medicine means people at least 20-30 years after retirement. Being able to afford an active retirement is a huge benefit of early investing. Each year of early investing brings you closer to retiring on your terms and puts you ahead of most of your peers.
Warren Buffett too started investing at a very young age, from the age of 11 to be precise and his investing philosophy is well known all over the world. He has earned a compounded annual growth rate of 20-25% for the whole of his investing career showing that you don’t need supernormal returns to become wealthy. All you need is regular investing and staying invested for a long time. Do check out our blog about Warren Buffett and his investing principles to know more about him.
One thing which Warren Buffett insisted on is investing in quality companies with good management, brand value, historical growth, strong market share in the industry. Investors find it intimidating to identify such companies given the amount of information available today. We’ve made that job simple for you by identifying a set of companies we have researched with the help of our vast experience in this field so that you don’t have to worry about the safety of your capital. Check out our product Stockbasket for more information.
If you have invested early, your retirement might just be around the corner. If you haven’t, sooner is always better. Start planning today to enjoy the 20-30 years post-retirement. You can retire comfortably knowing that your early investments have paid off.