Time is On Your Side
When should people start investing? That is a common question that comes up in many of my conversations. The simple answer is now. The sooner the better. A longer time horizon will bring added benefits to one’s portfolio and financial security. I realize that today is a difficult time to want to invest in financial instruments as stocks and bonds are in a tough bear market right now, where very little is working. I have provided a chart below that references the performance of major stock indices or (ETFs that follow those indices) over the last ten years. The chart clearly reflects that while at the end of the time period each market was higher, there were periods of time when the markets went lower.
Source: Koyfin
Analysis: Generation Capital Management
The following chart uses the same markets, but we have added an additional ten years to the chart. You can see that there is a bigger drop with each one of the lines occurring during the 2007–2009 time frame. This was the time when the financial crisis and stock markets across the globe were under pressure for over two years with many markets losing well over forty percent of their value. Even when factoring in this major bear market, stocks were still higher over the twenty-year time frame. In fact, the twenty-year returns are significantly better than the ten-year returns.
Source: Koyfin
Analysis: Generation Capital Management
The chart illustrates that over both time periods investing in the NASDAQ composite would have provided the greatest return. In the 20-year time frame, emerging markets and small cap stocks were next, followed by the S&P 500 and Dow Jones. It is important to note that if you have a very short time horizon for when you would need to take a distribution from your portfolio, you probably want to limit your exposure to equity markets. However, if you have a longer time horizon, you want to start investing and allocating a larger percentage of your portfolio to higher returning investments.
I will end with one final chart that helps to sum up why we recommend you start investing early. If you start investing $200 monthly at age 25 and hold for forty years, your account is worth over $500,000 at age 65 (based on an assumed 7% annual return). If you start investing at age 35 instead, your value at age 65 is worth just less than $250,000. Finally, if you wait until age 45 and invest for only twenty years the value is just over $100,000. A significant difference within ten-year intervals.
Source: US World and News Report
Analysis: Generation Capital Management
Scott Nasca, CFA